FuelCell Energy, Inc. (FCEL) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the FuelCell Energy Third Quarter 2016 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 introduce your host for today’s conference, Mr. Kurt Goddard, Vice President, Investor Relations. Sir, you may begin.

Good morning and welcome to the third quarter 2016 earnings call for FuelCell Energy. Yesterday evening, FuelCell Energy released financial results for the third quarter of 2016. 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 Web site at www.fuelcellenergy.com. A replay of this call will be available approximately two hours after its conclusion on the company Web site. 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, Q3 2016 highlights. Earlier this week, we introduced a truly breakthrough solution on a newest project, the 3.7 megawatt plant demonstrating approximately 60% electrical efficiency. This project is being fully developed and constructed by FuelCell Energy with construction to begin in the fall of 2016. I’ll have further comments later. We have been awarded three different megawatt-class, on-site projects. The contracts are currently being negotiated and we expect finalization near-term. Additionally, we received four awards for solid oxide fuel cell development from the U.S. Department of Energy totaling $3 million for power generation and more than $3 million for electrolysis to support long duration energy storage. We are working with DOE to execute contracts, which we expect to complete by the end of this month. We have more than 125 megawatts of fuel cell projects bid into a number of RFPs, and we are ready with projects under development for the expected 40 megawatt PSE&G Long Island RFP. Bid evaluators for the Tri-state RFP in the Connecticut DEEP 2 to 20 megawatt RFP report that the evaluation process is moving forward, but they have not announced a specific date for a decision. We remain optimistic based on the compelling economic profiles of these projects. We continue to execute our multiple installations globally, and I’ll provide updates on each project shortly. Our installed base continues to grow and will add to future services revenue. As illustrated by the 20 megawatt fuel cell park on the slide, now being constructed in South Korea by our Asian partner, POSCO Energy, multi-megawatt fuel cell parks located in urban areas cleanly and affordably support the electric grid. Also depicted is the 5.6 megawatt project we are completing for Pfizer that we expect to finish and sell in Q4 2016. We continue to focus on maintaining a strong capital structure. Having a strong financial posture is important to existing customers and prospective customers who are evaluating multimillion dollar projects with operating durations of 20 years or more. I will further discuss our projects, markets, and operations after Mike Bishop, our Chief Financial Officer views 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 summary. FuelCell Energy reported total revenues for the third quarter of 2016 of $21.7 million compared to $41.4 million for the prior year period with the decrease due to lower engineering procurement and construction, or EPC revenue, and the absence of module sales to Asia. An example of a driver of lower EPC revenue are the projects we retain on our balance sheet, such as the Riverside renewable biogas project, which Chip completed commissioning and financing. We will recognize electricity revenue over the 20-year term of this project rather than as one-time EPC in product revenue. Gross profit for the third quarter of 2016 totaled $400,000 compared to $3.6 million for the same period last year. The gross margin in the quarter was 2% compared to 8.7% in Q3 2015, decreasing due to a lower level of production and EPC revenue, partially offset by stronger Advanced Technology margins as projects transitioned to private industry funding. Operating expenses totaled $10.8 million for the third quarter of 2016 compared to $10.7 million for the prior year period. We continue to focus our R&D spending on product enhancements, specifically targeted towards revenue opportunities in the utility market such as the high-efficiency fuel cell and other multi-megawatt configuration. Net loss to common shareholders for the third quarter was $11.8 million, or $0.38 per basic and diluted share. This compares to $7.3 million, or $0.29 per basic and diluted share in the third quarter of 2015. The company’s cash, restricted cash, and financing availability totaled $179 million at July 31, 2016. During the third quarter of 2016, we strengthened our cash position with a registered direct offering of common stock and warrants to one institutional investor. This capital positions the balance sheet for the expected growth and backlog that we are forecasting based on multiple projects being pursued. We also see this capital raise as an important signal to existing and potential customers regarding our financial strength and the resources that we have available to support long-term service and operating agreements, which may span decades. Backlog totaled $392 million at the end of the current period, as illustrated on the chart on the bottom left of the slide. At the end of the quarter, service backlog totaled $299 million, product backlog totaled $35 million, or 16 megawatts, and Advanced Technologies contract backlog totaled $58 million. These numbers do not include the Beacon Falls project or other projects bid into request for proposals or notices of awards. Turning to the inventory and project assets graph at the right side of the slide, inventory and project assets increased with continued construction of projects. The previously referenced Riverside project is included in the long-term project assets account and was financed in early September under the PNC Energy Capital facility generating approximately $9 million in cash. We expect to finance another project under the PNC facility, which is located in California and nearing completion during the fourth quarter of 2016. These projects are being retained by FuelCell Energy, whereby we own the Power Purchase Agreement and receive electricity revenue monthly from the sales power to our customers. Short-term project assets include the 5.6 megawatt Pfizer project, which is under construction and expected to enter commercial operations in our fourth fiscal quarter. We are currently in negotiations regarding the sale of this project upon commissioning. Based on the expected sale of the Pfizer project, current backlog and anticipated order activity, we are forecasting fourth quarter revenues in the range of $56 million to $86 million, which is in line with our previously stated full-year guidance. I would like to reinforce comments in prior quarters regarding the change in sales mix as we near a new fiscal year. We will be concluding the multi-year 120 megawatt fuel cell kit order to POSCO Energy during the fourth quarter of 2016. As this volume is replaced with complete turnkey projects in future quarters, margins are forecasted to expand as complete power plants have higher margins than fuel cell kits. This is we – why we reduced our break-even production rate as highlighted on the earnings call last quarter. As a result of this change in sales mix and timing expectations of new product deliveries, we are adjusting our production rate in the fourth quarter of 2016 to 50 megawatts on an annualized basis. In closing, we expect meaningful revenue growth in the fourth quarter. Our balance sheet is strong and the company is well-positioned to execute on near-term market opportunities. I will now turn the call back to Chip. Chip?

Thank you, Mike. Please turn to Slide 6, Latest Solution. Our new 3.7 megawatt enhanced efficiency fuel cell power plant is specialized configuration of our basic power plant and is designed for utilities, large industrial users, and the growing data center market. These customers are focused on clean and affordable power and is driven more by electrical efficiency rather than total thermal efficiency. Our goal is to create a power plant to compete with combined cycle plants in terms of efficiency, economics, yet be cleaner and easier to site and construct. With a third fuel cell module integrated on to one of the standard two module power plants, this innovative design generates ultraclean power up to 60% net electrical efficiency, the equivalent of a very large combined cycle power plant. Unlike remote combined cycle power plants, however, our distributed solution can be situated in urban areas, avoids transmission and its associated line power losses and eliminates criteria pollutants emitted by combustion-based power generation. As we just announced, we’ll soon begin construction of our first megawatt scale project utilizing this configuration to showcase our ability to generate ultraclean power using minimal land and enhanced grid resiliency, while contributing to local and state tax revenue. We expect to sell the ultraclean power plant to the local – power to the local utility and we will explore selling the project once operational. Our enhanced efficiency designs can be scaled up to 100 megawatts, allowing them to be built easily and quickly in densely populated areas, making them ideal for urban redevelopment. fuel cell projects in Beacon Falls, for example, return dormant property to tax rolls that drive urban renewal. Remote central generation projects simply cannot compete with this all-encompassing value proposition for local economic development. This configuration lends itself to distributed generation resources by improving reliability, visibility by capacity markets and avoidance of distribution level investment. Please turn to Slide 7, Market Update. The 63 megawatt Beacon Falls Energy Park was bid into the Tri-state RFP. In July, reviewers announced that additional time was needed for their evaluation. We remain confident that the fuel cell park provides a very compelling value proposition with advantages in other submittals cannot offer. The project will both drive and pave for natural gas, electrical and water infrastructure, which contributes to adjacent economic development. Many competing bids require construction of transmission lines for additional power sources. The Energy Park will generate property and sales taxes and provide the benefits of manufacturing in the region, which competing projects don’t offer. Importantly, this park will generate up to five times the amount of renewable energy credits, or RECs, as a similar sized solar rate due to lower availability for solar in the region, helping the state achieve its renewable portfolio standard sooner with lower investment. As we also discussed this last quarter, we submitted multiple bids totaling more than 50 megawatts of power plants into an RFP issued by the Connecticut Department of Energy and Environmental Protection for clean energy projects in the range of 2 to 20 megawatts. We expect decisions on this RFP within a similar timeframe as the Tri-state RFP. We are also working to close different on-site projects as well. We continue to develop multiple projects on Long Island in anticipation of a 40 megawatt fuel cell RFP from PSEG Long Island. As original bid submission date of August 1 was delayed by PSEG, the RFP entire structure is on the agenda and expected to be approved at the upcoming life of September Board meeting, with an effective submittal date of October 1. The State of New York is implementing energy policy to support adoption of a variety of renewable energy sources, including the recent increase to their renewable portfolio standards to 50%. Fuel cells operating in natural gas or renewable biogas are eligible and will drive demand for our solutions. In support of this increase RPS target, the State has also introduced a new tariff structure that values distributed generation in the support of the development of micro-grid projects. California State Legislature recently passed AB-1637, which will support on-site generation using fuel cells, including those operating in natural gas. It raises from 1 to 5 megawatts the limit for the fuel cell net energy metering projects that are eligible for exemption from non-bypassable charges assessed by investor owned utilities, and it extends the current legislation expiration to December 31, 2121. In addition, AB-1637 doubles annual funding for the Self-Generation Incentive Program from $80 million to $160 million. Implementation will begin once the legislation is signed by the governor who is supportive. Getting this done has been a priority of our team. The new law will help support and expand market opportunities in California, as exemption of non-bypassable charges can add significant value to project. One component of our strategy to grow the European market is to work with the leading European companies to expand market access. As an example, Andreas Froemmel, Vice-President of Business and Commercial Development at FuelCell Energy Solutions was appointed Vice Chair of Hydrogen Europe, a leading industry association of 100 companies dedicated to advancing deployment of hydrogen fuel cell technologies in Europe. Other companies represented on the Board include industry leaders, such as Engie, leading French-based utility, and Siemens. We have received notice of award for another high-profile megawatts fuel project in Europe, which we expect to finalize in 2016. I would like to comment briefly on the Investment Tax Credit. As I mentioned on our last call, the senior leadership of both parties in the U.S. House and Senate have publicly committed to correct what they acknowledge the drafting error with the ITC legislation. And they have committed to correct an oversight during the year. We remain confident this will occur. In the meantime, we’re mindful the legislation in the U.S. will not affect our global business in Europe and Asia, and that all of the projects in our backlog will be completed in 2016 within the window of the existing legislation. We continue to focus on cost reductions and solution refinements, such as the enhanced efficiency configuration as we discussed, which will allow us to remain competitive. While we construct fuel cell parks relatively rapidly, historically, within 9 to 15 months, these projects are not eligible for the ITC until they are operational. This means that a project such as Beacon Falls, if awarded, will not be eligible for the ITC until it becomes operational. So while we want the ITC legislation corrected and strongly feel it’s the right thing for Congress to do, the delay will not impact the projects we have under development. Please turn to Slide 8, Installed Base Expanding. A number of on-site CHP projects became operational in key markets. The utility owned 1.4 megawatt on-site CHP power plant we installed at a manufacturing facility in Germany is now operational. This is the first megawatt fuel cell power plant operating commercially in Europe. It was constructed under our agreement with EON, one of Europe’s leading energy companies and one which values how we provide a turnkey solution for installation, operation and maintenance. We will be attending a dedication event at the site in September, hosted by EON, with attendees including prospective customers and government officials. In California, as we recently announced, the turnkey solution we provided for the Riverside regional water control plant is operational. The project is structured, so that the customer, the City of Riverside pays only for power generated by the plant, achieving immediate operating savings without any capital outlay in a manner that supports the sustainability goals. We installed and will operate and maintain the complete 1.4 megawatt on-site CHP power plant, inclusive of the renewable biogas cleanup system designed by FuelCell Energy. The city buys carbon neutral power from us to support its operations under a long-term Power Purchase Agreement. As Mike mentioned, we retained the PPA and earned money monthly revenue from the sale of power, with financing provided by PNC Energy Capital. Our proprietary biogas cleanup system allows us to offer an affordable and comprehensive turnkey solution. This ensures the cleanup process is accomplished to a uniform standard and lets us take responsibility for the complete system on our customer’s behalf. This model can be replicated throughout our markets. In Connecticut, the 1.4 megawatt on-site CHP power plant purchased by Pepperidge Farm’s Bakery is now supplying affordable ultraclean energy for repeat customers commercial operations. It supplements an existing FuelCell Energy power plant that was installed in 2008. Our fuel cell solutions are helping this commercial operation realize significant energy cost savings and dramatically reduce pollutant emissions while improving energy security and power reliability. This project recently won an industry sustainability award. Three previously announced projects are under construction. The 5.6 megawatt on-site CHP plant at Pfizer is expected to be completed during the fourth quarter of 2016. The 1.4 megawatt on-site power plant at Santa Rita Jail in California is expected to be completed during the fourth quarter of this year. Our customers upgraded to a new point – a new plant that will replace the smaller FuelCell Energy power plant that was installed in 2006. Like the Riverside installation, we expect to retain this project on our balance sheet that will recognize revenues from the sale of clean power to a 20-year PPA with the County of Alameda. Finally, we expect the 2.8 megawatt on-site CHP power plant being installed for repeat utility customer United Illuminating in the town of Woodbridge, Connecticut to be completed towards the end of calendar 2016. Our power plant will serve as a clean energy source for the town’s micro-grid. Please turn to Slide 9, Global Operations. We are excited to see work unfolding on the first phase of the two-phase expansion of our North American manufacturing facility in Torrington, Connecticut. External site work is nearly complete. The foundation work is underway. We are reconfiguring aspects of our plant processes and making adjustments to some work areas to enhance continuous production flow and prepare the transition to an increase in complete module manufacturing. This carefully timed capacity expansion positions us to meet future demand forecasted to arise from the numerous pending RFP awards, including utility scale projects, such as large fuel cell parks and potential carbon capture project. Our prudently financed investment in this expansion will provide near-term operating cost reduction. In Asia, the manufacturing automation line of POSCO Energy state-of-the-art campus in South Korea is fully operational. Our team has been working closely with POSCO to optimize the production line layout and corporate material handling automation and foster a culture of continuous improvement. POSCO is also progressing with construction of a 20 megawatt Noeul Green fuel cell park in Seoul, Korea as the photo on opening highlights slide illustrates. Please turn to Slide 10, summary. Numerous projects are progressing and work is ongoing, turning awards into contracts ready to execute. Due to the strong profiles, we’re very optimistic regarding more than 125 megawatts of clean energy projects currently pending decisions, including those under the Tri-state and DEEP RFPs. We’re closely following a perspective PSEG RFP and expect to submit bids. We continue to strengthen our balance sheet to support these in future project proposals. Several new power projects have come online, expanding our installed base. These include the first megawatt class fuel cell power plant operating commercially in Europe and a comprehensive turnkey installation in California, featuring FuelCell Energy’s design biogas clean up system. Nearly 10 megawatts of new power projects under construction will be commissioned near-term. Our growing installed base is adding to future services revenue. The worldwide fleet has generated more than 5 billion kilowatt hours of ultraclean electricity, an industry record. Our skilled team of associates has been working hard to develop a large, high quality project pipeline. We are very optimistic and prepared to execute on multiple significant opportunities that are pending now, and we look forward to sharing news and additional information soon. Thank you for your continued support. Operator, we’ll be happy to take questions at this time.

Thank you. [Operator Instructions] And our first question comes from the line of Craig Irwin with ROTH Capital Partners. Your line is now open.

All right. Good morning and thank you for taking my questions. So, Chip, I was hoping if you could give us a little bit more color on the discussions for ITC renewal? And then, the discussions related to ITC that you’re having with customers and prospective customers, whether or not they’re willing to start projects, initiate projects, spend money on actually getting things constructed, understanding or the optimism that they get retroactively compensated for their projects?

Yes. Good morning, Craig, certainly. So as I said in my comments, my expectation is the ITC will get resolved. And I might add, there’s also some other things that we’re trying to do as well to be favorable to our business at the federal level. I think there’s three different windows. There’s obviously a window now that Congress is back in session. There’s a window when they come back after the election, and of course, there’s a window when they come back with the new Congress. So we have multiple shots to try to get that done. So, again, we’re doing lots of different things and the feedback is all positive. It’s just a question of finding the right vehicle to get it done. Relative to the projects themselves, we’re working on – now there’s no slowdown and people not expecting to get that. In fact, some of the bigger projects, as you mentioned, we’re not the one spending some of the development money, things like interconnection and some other things like that. But people are doing that because a lot of the kind of expense that you have early on in the project have – there’s no limited shelf life to them. So, for example, if you do an interconnection study or those kind of things, you can develop a project another way. So we don’t see any of that, Craig, at the moment. And of course, it doesn’t affect any of our revenue that we have planned for the fourth quarter either.

Okay, excellent. Can you update us maybe on what we can expect in carbon capture over the next few quarters? One would assume that the DOE is committed to moving forward on additional projects, they’ve shared plans for another 11, I would suspect may be that there’s something coming down the pike with ExxonMobil or other partners that you have. How involved do you expect FuelCell Energy to be in the carbon capture maybe at this time next year? How many projects would you maybe consider executing next year as overall momentum in this market ramps?

So, yes, a few questions there, Craig. Let me try to answer them all. So, specifically to the contract that we have with the DOE, we’ve been working on the site aspect of that, and that’s moving forward, there’s no question about it, and we’ll have an announcement on the site selection here very, very shortly. The work we’re doing with Exxon directly is going very, very well. In fact, we just had a meeting with them. We’re very well engaged and our teams are very well aligned. As far as other new opportunities, there are those that is true, whether it’s DOE, but we’re also seeing opportunities emerge besides those sponsored by the government, private companies needing to have solutions for the things that we do. So I would say that we – there’s a lot of activity around the world on carbon capture. We’re very keen on it. And those things, as Mike kind of mentioned that, we’ve got a pretty good backlog in our Advanced Technologies business, but we’d expect that to turn into revenue relative to carbon capture here in the next subsequent quarters.

Okay, excellent. And then a clarification of your comments there. The site selection over to DOE for the projects, does that include in the discussion in your prepared remarks and also in the press release about projects in negotiation or would that project be incremental to those projects?

That’s incremental to that. Yes, that’s a project we already have, Craig, the carbon capture with the DOE. That was my comment about the announcement on the site will be coming shortly specific to that, yes.

Okay, excellent. Then Beacon Falls, I hate to sort of flog this one repetitively, but this is potentially a really important transformational contract for FuelCell Energy. Can you maybe give us a little bit more color on where things stand in the process? And my understanding is that there has to be some dialogue at this point, particularly if the project is likely to go forward. Is there anything maybe that FuelCell or its partners can be doing that would increase the probability of this project seeing the funding necessary for future execution?

Yes. So let me kind of just reiterate maybe with a little more detail on the status. But no decision has been made on – that was a Tri-state RFP. The decision on what to do will be by individual states. But nobody has made any decisions, because there are some common projects they’re contemplating that have to do with the transmission and things like that across multiple states. But we continue to answer questions relative to what we’re doing. You’ve probably seen in the news that people are talking about it, and it certainly is viewed very favorably by a lot of the constituents, and so we’re very keen on that. And our partner, O&G Industries is a very well financed company here in Connecticut as well, it’s their property. What I would say is that the things that we continue to do since the decision hasn’t been made are things that we’re doing. They look very carefully at, can these projects be executed on? Do they have Siting Council approval? Do they have interconnection agreements? Do they – are they favored by the utilities? And, for example, the capital raise that Mike referred to and you’re aware of that we did a few weeks ago was all about making sure that we had the wherewithal to execute that, because that is a critical part of these projects. Nobody wants to pick a project that doesn’t get done, at least, not the state does it-, in Connecticut. So I think we’re doing all the things we can do. We’re in contact with the relevant people answering questions quickly, working on the different things. So I can’t think of anything, we’re not doing. Everything is pretty positive and the feedback is very positive as well from the different stakeholders, because they themselves are probably talking to people saying, hey, pick us, pick us, because there’s a lot of in it, as we mentioned from a local economic development. So it’s kind of a – I think a win-win is is what we’re really trying to do right now.

Great. And my last question, if I may. This quarter, I guess, we’re a little bit light on the top line, but SG&A spending was very well managed. I mean, that was nice to see the tight control there. Can you may be comment how you see things progressing sequentially into the fourth quarter? From an SG&A spending standpoint, are you likely to see the same constrained level of spending? And where do we – progression, should we expect a fairly significant sequential increase in GAAP revenue, or is it sort of a run rate as we reposition the portfolio?

Craig, I’m going to ask Mike to answer that, so he can get an answer here as well. So I don’t take the whole conversation here. So go ahead, Mike.

Thank you. Good morning, Craig. Thanks for joining the call.

Sure.

I’ll take that one. Let me start with revenue, Craig. And as I said in my comments, we do expect revenue to be in the range of $56 million to $86 million in the fourth quarter. So a meaningful increase over the third quarter and that’s really driven by current backlog, anticipated order activities, as we talked about, and then the Pfizer project getting few commercial operations in the fourth quarter. We expect to sell that in the fourth quarter, which will generate revenue as well. As far as SG&A, thank you for the comments there. We continue to manage operating expenses, both SG&A and research and development movement tightly. You could see some modest increases in the fourth quarter, but certainly, nothing significant of where we sit today.

Thanks again for taking my questions.

Thank you. Have a great day.

Thank you. And our next question comes from the line of Carter Driscoll with FBR. Your line is now open.

Good morning, Mike and Chip, how are you today?

Good morning, Carter.

Good morning.

Just following up on Craig’s question. So what really kind of gets you between the low and the high-end of the range? Is it really timing of project completions, or is it that one bucket that kind of gives you the $30 million range, your anticipated activity, or is it pull through the backlog? Just trying to get a handle on what could kind of push us in one direction to the other for 4Q?

Sure. Carter, this is Mike, and thank you again for joining. Yes, so I think you characterized it properly there, Carter. We obviously have a strong inventory balance where we sit today. So as we get new contract awards, we can execute on those awards quickly and generate revenue from them. So the purpose of the range is really around timing of new awards. The sooner we get new awards and execute them, the more likely will be towards the higher end of that range.

Okay. But I’m assuming it doesn’t include any of the bids that you talked about in the Beacon Connecticut at June 20 [ph] or PSEG, correct?

I’m not going to comment on specific contracts. I would say, as Chip said as well, that we have a fair number of contract in negotiation right now that they could drive revenue increases in the fourth quarter.

Fair enough. Okay. Can you talk maybe a little bit more specifically, you gave good color on Beacon Falls and like you said, they’re evaluating a multi-state or an interstate transmission project, which probably delaying some of the other awards. Can you talk more specifically about PSE&G ahead of their board meeting and talked about that last month, so it got pushed out. Just talk about your expectations or timing, if they do everything that you think they’re going to do in terms of them going forward with this – with the 40 megawatts? And just lay out the timing? I’m assuming it’s probably not pushed any type of revenue contribution into calendar 1Q 2017, just trying to get your expectations there for that [Multiple Speakers] in RFP?

Yes, the – what they’re – it’s a pretty simple thing they have to do. They just have to basically say, okay, go. And – but they didn’t have the Board meeting in August for different reasons. So the next opportunity is the 21st of September. So assuming that they say, they have that meeting and it gets on the agenda and they say yes, then basically, the window for projects opens October 1, as I said, in my remarks. That goes on, again, it could somewhat change, but just directionally that goes on for a couple of three months, Carter. And then, they would then have those things in, and then they would make a decision on the projects in Q1 of 2017. Now could you do some projects in 2017 revenue? Well, it just kind of depends. Look, we’ve got – we’ve been developing sites for months, if not years, out there with some very strong partners, and that could result in some revenue in 2017 if we were selected, but certainly, 2018 and beyond, for sure. So…

Okay.

…we’ve got some very interesting projects. We’ll be very competitive lining up with where PSE&G has told us they want the power to come from and all the other criteria they’ve given us. So we’re pretty keen on that.

Okay. Thank you for that color. You talked about in your prepared remarks a couple of different two additional PPA projects you’re hoping to be commissions and potentially a financial. So I’m assuming these are existing financing partners for those? And then as a follow-up, is there at some point you might actually breakout specific electricity sales? I realize it’s relatively low component today, but do you anticipate as you switch to more of this model that you would introduce that type of line item?

Hi, Carter, this is Mike again. So, yes, absolutely. As we said in the past, a 1.4 megawatt project is about $1 million a year of electricity revenue. So as we get more scale there, we will break that out separately on the income statement, but certainly provide more disclosure around it in our public disclosures. Happy to do that.

And any particular pressure on the PPAs themselves in terms of either length or rate? Certainly seeing some compression in PPAs and solar land, maybe just some color there as to what you’re seeing?

I’ll start and maybe Chip could jump in. But no, we – typically, our PPAs have been long-term north of 10 years. The Riverside wanted a 20-year Power Purchase Agreement, which just entered commercial operations.

Yes, Carter, the structure of the project that we would do versus solar is very, very different. I mean, in the case of Riverside, they’re providing us with fuel and things like that. So these are projects that we wouldn’t apply to solar. And even the other ones when we apply, we’re – in some cases, we’re doing steam as well and things like that. So while we don’t see – I think that’s a very specific dynamic to solar that you’re seeing with that compression. Part of it might just be competitiveness driving some of that, whether that’s sustainable, I don’t know, but we don’t see that aspect of it, no.

Okay. And then I guess just my last question obviously, there is not a whole lot else you can say about your development with ExxonMobil. But you seem pretty confident that the site selection with the Department of Energy is going to occur in the near-term. Can you talk about what you have or have not learned in this process with Department of Energy? And does it – are there any applicability to the developments you are doing with ExxonMobil? I realize once coal versus natural gas with initial implementation for the first phase, anything that you could compare and contrast or share notes? Are you able to do so across those two projects as well?

Yes, let me say this. The ability to work with these different people was Department of Energy, a company the size of Exxon and frankly, utility people as well, because that’s where this plant will ultimately be built in. Those will be the customers in the future. It’s extremely pleasant. And what I mean by that is, we got something here that apparently nobody else has. We’re dealing with people that are very logical and talented and well financed. So there’s a – they’re not pressured to take shortcuts. And we’re really talking about the things of the critical issues to be successful. Just two days ago, we had a meeting with Exxon at very high levels. And we just checked in on how’s it going and it’s going very well. So no, I’m – I think it’s all about the people. I think it’s the fact that it was organized properly. I think it’s the cultures and it’s all seems to be working very nicely. But relative to coal and gas, there is a natural association there, because those are the two primary fuels used by, at least, in this country, 60% or so of power generation and most utilities comes from those two sources. So they really need a solution to that covers both. And it’s kind to nice to have some of that expertise and that we perhaps wouldn’t have. But we talk about – when we talk to the Department of Energy, they like what we’re doing. We keep them brief. They like Exxon, they like us, utility companies are all in the mix there. It’s a pleasant process. So...

Okay. I appreciate that. I’ll get back in the queue. Thank you for all your answers.

Thank you.

Thank you.

Thank you. And our next question comes from the line of Eric Stine with Craig-Hallum. Your line is now open.

Hi, everyone. A lot of my questions have been asked and I’ll just limit myself to two. But first, you mentioned the negotiations on the 3 megawatt class projects. Don’t know how limited you are, but if you could provide any details around size, potentially application and timing, that would be great. And then also, I mean, these things that you view as once that you will own, and then there will be PPAs or potential project sales?

Eric, good morning, it’s Chip. You said the three projects, is that what you’re referring to?

Yes. I mean, in your prepared remarks, yes, you talked about the thee that you’ve been awarded, but and you’re in negotiations to the non-backlog. Yes, disclose some details would be great.

Yes, I’ll give you what I can. So what I can tell you is, one of us in Europe, I was specific in my comments about that, which we’re happy about. And that will be a very high-profile site, again, building on what we did, the plan that we had to enter the market there with megawatt class solutions. The other two are in the U.S. I would say that these are – we’re happy about these projects. They were very competitively bid. I think it illustrates our business model. I wouldn’t assume that these would be necessarily done as the Riverside was done through PNC.

Okay.

I’m sorry, I really can’t say any more than that. But I expect to have details made public here shortly.

Got it. Okay, thanks for that. And then and maybe second one, just sticking with Europe, it sounds like that the one project that you just talked about that may be is outside of EON, don’t know if that’s the case or not. But just sticking with EON, now that you’ve got that first project in operations, wondering how you’ve seen the pipeline develop in the sense you’ve gotten tied up with EON. And then with the reference project in the ground, are there other projects they have that are triggered once that starts, or is there a need to be an operations period before you start to see more activity with EON?

So first of all, our focus is to do business with them, because they’re obviously – they have a business focused on building out distributed generation, right, when they split the company up the – with one of the, they call the commercial partner of EON, what is the name EON today. But we also have activity we do directly outside of business with EON. So I would say, it’s not anything in competitiveness. It’s just kind of we focus on different things, because we can. I would say that while we do have a pipeline of activities, given the fact that the project in Germany is the first of its kind, that does have some semblance of, we’d like to see it run, I have to be honest with you, and we’re having a big ceremony in the middle of September over there with EON, and they’ve invited potential customers and government officials and such, and we’ll have some strategic meetings with them about how we go faster. But it wasn’t necessarily the reason that things haven’t progressed any faster. I think when they see this plant and everybody always does, when they see it for the first time, they’ll get more comfortable, which is somewhat of a natural thing. But I see that as – it’s not the biggest driver, but more of an enabler.

Got it. Okay, thanks a lot.

You bet.

Thank you. And our next question comes from the line of Jeff Osborne with Cowen. Your line is now open.

Yes, thanks. Most of my questions have been answered, but just wanted to follow-up on one of Eric’s actually. You mentioned that you’ve been awarded these contracts and you’re competitively priced, Chip. I’m trying to get a sense of what – at that point, what’s left to negotiate?

Oh, Jeff, I’m sorry. Yes, let me clarify. So the – obviously the – depends on where it is, whether you’re in the Europe or you’re in the U.S. But when you get an award, then you actually have to sign the contract documents. So those contract documents depend on the nature of the transaction. In other words, if it’s a PPA, there’s a PPA document, you have to actually work through and get signed and all that. If it’s a non-PPA document, then there’s a commercial and service agreements, there’s two different things. You just have to work through that. That’s – everybody wants to take their $0.02 and work through it. So it’s nothing sinister. It’s just it takes time. It needs to go through the different levels of attorney reviews and things like that with these particular companies.

Got it. Okay, so some of these could get across the finish line relatively quickly, and then you could take the product out of inventory and quickly deploy them, at least, the two in the U.S. to be up and running by the end of the calendar year to capture that ITC then? And that would then actually all three of them? I guess if all three get across the finish line and they get you to the high-end of the range?

Yes, it depends, not only those, there are some other things. But these projects could be revenue recognizable, if that’s a word, Jeff, as compared to like when we do these PPAs, we typically take them all at the end. So…

Right.

Yes, I don’t want to get into too many details, but you’re right. We have the inventory. The inventory does match with the profile of these projects and that could possibly be the case.

And what’s – I might have missed it in the prepared remarks, but I saw the slide about the short-term and long-term assets on the balance sheet and inventory. But the thing I missed is, what – on finished goods inventory, how much megawatts do you have today that are deployable?

Jeff, this is Mike. We have around 5 megawatts of deployable inventory today.

Got it, okay. And then maybe, Mike, just a couple for you is, did you give the – you had a couple of prepared remarks on POSCO and you’re reminding people how that winds down. Did you give the kits megawatts in the quarter?

Kits megawatts shipped in the quarter, is what you’re looking for?

Yes, exactly, recognized from POSCO?

Yes, sure. So in the quarter, we shipped – let me just make sure I have the right number. We shipped 8.4 megawatts of kits to POSCO in the quarter. We have and just to kind of complete the question, so we have 4.2 megawatts of kits remaining that we are shipping in the fourth quarter.

Okay. And then, that gets you to the 121, I think it was cumulative?

Yes.

I got it, okay. And then how is the POSCO facility running? I know there was some – we discussed this some three months ago, but there were some press reports about some issues or potential issues there, and what’s your perception now three months later, and the ability to get royalty revenue as that facility ramps up?

Well, let me comment on a couple of things here, Jeff. Mike and Tony and others have been there just recently. And I would say that their facility is spectacular. We put some extra automation there as part of a plan to do it there for, we do here. And if Tony was here on the phone, he would tell you, it’s everything they expected and more. So they’ve got a beautiful facility. The – and there’s a process of which you have to start – you’ve got to run a certain amount of trials, and then you got to check those components to make sure they’re right. But they’re actually – that picture you saw making their own stack, they’re actually making materials to make stacks and, of course, stacking the kits that they were still shipping them. So from a business perspective, it’s moving. You saw the 20 megawatt plant, they got that contract I think in – I don’t know, earlier in the year May, maybe. And you can see, they already deployed a bunch of stuff using the inventory. So they’re not stockpiled inventory. So I think there’s a very natural flow, very organized process in which they’re going through at the right kind of pace. Relative to the earlier comments, yes, I mean, the comment was that they had some reduction in force. That’s exactly true for two reasons. One, the – as they ramp up, they needed more people to do certain things and as we always do with them, we have dialogue about what’s the right manpower, what are you going to do, what are we going to do, things like that. And after that review session, basically resulted in a reduction in force, which is now complete. So there’s nothing sinister about that other than as the business changed and the plant got built and everything else. We have these operation reviews with them and the result was they needed to reduce their work force, which is now complete.

Got it. And the last question I had just, assuming, Mike, if you get to the midpoint of the high-end of the revenue guidance range, I would assume with the reduction in inventory and just the higher revenue levels and also the lower mix of kits, that 4Q would be on a cash flow positive quarter, is that a safe assumption?

So Jeff, from a – yes, what I would say, Jeff, from a cash perspective, we certainly ended this past quarter with a strong cash balance. We – as I mentioned, we completed financing on the Riverside project. We have another financing to complete with PNC for another project in California, and we expect to sell the Pfizer project. So we should have strong cash flow in the fourth quarter as well.

Okay, great. Thank you.

Yep, thank you, Jeff.

Thank you. And I’m showing no further questions at this time. I would like to turn the conference back over to Mr. Chip Bottone for any final remarks.

Thank you very much everybody for joining today and some very good questions. I guess, I’d characterize the quarter as, we continue to execute, as we’ve said, everything from improving the balance sheet to the installed base expansion to executing on good use of product development dollars and things like that. The comments were, the fourth quarter revenue is going to be significantly higher than we had, at least, due to timing. So as and we’re very confident on the activity we’ve got in front of us that could close and keep that going. So with that said, we’ll be announcing things over the next several weeks, different questions that people ask, and we’ll give some more details on those and appreciate your constant interest in what we’re doing. So with that, I’ll close the call, and you all have a great day, and we’ll talk to you next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.