Good morning. My name is Casey and I will be your conference operator today. At this time, I would like to welcome everyone to the FuelCell Energy Q3 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Tom Gelston, Vice President of Investor Relations, you may begin your conference.

Thank you, Casey, and good morning, and welcome to the third quarter 2018 earnings call for FuelCell Energy. This morning, FuelCell Energy released financial results for the third quarter of 2018. The earnings release as well as the presentation that will be referenced during this earnings call are available on the Investor Relations section of the company's website at www.fuelcellenergy.com. A replay of this call will be available approximately 2 hours after it's conclusion on the company's website. Before proceeding with the call, I would like to remind everybody 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 it's fuel cell technology and its business plans. I would like to direct listeners to read the company's cautionary statements on forward-looking information and other risk factors in our filings with the U.S. Securities and Exchange Commission. Now, I'd like to turn the call over to Chip Bottone, President and Chief Executive Officer. Chip?

Thank you, Tom. Good morning everybody and welcome. Please turn to Slide 4, Highlights. Today, we announced our third quarter 2018 results and current business highlights which include backlog and project awards totaling $1.9 billion; new contract awards in Connecticut comprised of 22.2 megawatts of fuel cell projects awarded by the Connecticut Department of Energy & Environmental Protection or DEEP in June as part of a competitive solicitation for Class 1 Energy; execution of a 20-year service agreement in South Korea with Korea Southern Power Company or KOSPO; closure on the sale of 1.4 megawatt Trinity College Project to AEP OnSite Partners; continued execution on several high profile projects that represent our versatile technologies utility grid, micro grid, and tri-generation capabilities, including projects totaling 39.8 megawatts for New York's Long Island Power Authority or LIPA, the 7.4 megawatt fuel cell park for CMEEC, our Municipal Electric Cooperative which will serve the U.S. Navy Submarine Base in Groton in a secured micro-grid, and our multi-megawatt tri-generation fuel cell power plant for Toyota at the Port of Long Beach in California. I'll share more details on each of these exciting developments later in the call. Relative to KOSPO, I just returned from Korea where among other things, FuelCell Energy was honored in a very thoughtful ceremony hosted by KOSPO officials, including its CEO, Dr.JS Shin. The 20-megawatt power plant showcases our capabilities, is operating as expected, and the KOSPO leadership is thrilled and very proud of its first fuel cell project. At the start of the fourth quarter, we closed on the sale of the 1.4 megawatt project at Trinity College in Hartford to AEP OnSite Partners. We are excited to enter into this transaction and build a relationship with AEP, one of the largest electric utilities in the U.S. through its…

Thank you, Chip. Good morning, everyone and thank you for joining our call today. Please turn to Slide 5, titled Financial Overview. FuelCell Energy reported total revenues for the third quarter of fiscal 2018 of $12.1 million compared to $10.4 million for the third quarter of fiscal 2017. The gross loss generated in the third quarter of fiscal 2018 totaled $2.1 million compared to a gross loss of $2.6 million in the third quarter of fiscal 2017. Margin in the quarter was impacted by the low production volume and a service related charge. Manufacturing variances primarily related to low production volumes totaled approximately $3 million for the three months ended July 31, 2018 compared to $3.4 million for the three months ended July 31, 2017. Also service margins in the third quarter of fiscal 2018 were impacted by $1.2 million of costs related to the termination of a legacy sub-megawatt service agreement in the quarter. Given the level of backlog and recent project awards, the company announced in July its decision to increase its production rate with a goal of reaching an annualized run rate of 55 megawatts by April 2019. We expect this increased production rate to lead to improved margins over time. Operating expenses for the third quarter of fiscal 2018 totaled $12.4 million, compared to $11.7 million for the third quarter of fiscal 2017. Net loss attributable to common stockholders for the third quarter of fiscal 2018 totaled $17.6 million, or $0.20 per basic and diluted share compared to $17.8 million or $0.31 per basic and diluted share for the third quarter of fiscal 2017. Net loss attributable to common stockholders in the third quarter of fiscal 2018 includes a deemed dividend totaling $939,000 on the company's Series C convertible preferred stock. Adjusted loss before interest, taxes,…

Thank you, Mike. Please turn to Slide 6, Business Execution. Starting with our projects currently in execution, all three of the projects totaling 39.8 megawatts for New York's Long Island Power Authority are progressing well and on schedule. We are currently in the project execution and permitting stage of these projects, we anticipate the PPAs will be executed in the fourth quarter of this year and we expect to be in construction in 2019 on accordance with the schedule. Our project with CMEEC and the U.S. Navy will be operating in electrical efficiency of more than 60%. On July 25, we celebrated the groundbreaking for the 7.4 megawatt fuel cell plant located on the U.S. Navy Submarine Base in Groton, Connecticut. Operator under a PPA with CMEEC, regional municipal electric cooperative, the project will use two of our innovative SureSource 4000 high electrical efficiency fuel cell plants producing 3.7 megawatts of power each. In figures of micro-grid, our power plant will supply the U.S. Navy with ultra-clean secure power ensuring energy resiliency in the event of the power outage. Construction is underway and the power plants are scheduled to begin operating in spring of 2019. As announced in June, the Connecticut Department of Energy & Environmental Protection or DEEP awarded us fuel cell projects in a competitive RFP for Class 1 Clean Energy totaling 22.2 megawatts. The projects include one 14.8 megawatt project located in Derby, Connecticut; and one 7.4 megawatt project located in Hartford, Connecticut. Welcome by their respected communities, these projects will provide clean base-load power with resiliency benefits under normal energy credits to the Connecticut utilities under a 20-year power purchase agreement. Our project development team is now on a regulatory process required to finalize the PPAs with the local utilities working to obtain the sighting approvals…

[Operator Instructions] And your first question comes from the line of Colin Rusch with Oppenheimer.

Can you talk a little bit about the cadence of moving your sales pipeline forward from leads into awards, and then awards into actual bookings? And what the rate is that you are seeing any sort of drops from those project awards into your end of the bookings on your backlog?

From a cadence perspective the way a project works is, you get an award and then you sign a power purchase agreement; so between the time it's an award, it shows up in the award number which I talked about, and then once you sign the power purchase agreement, it actually goes into the booking category as I think we've explained. So -- but it's a normal process here, you have to go through that process every time, and there’s always different projects that happen the same way, and that's why I said on the LIPA thing, we expect to sign those here shortly. And then subsequently, when -- the ones in Connecticut, there is -- those will get done in the fourth quarter, by the end of the year as well. So that's just kind of the normal cadence, it's probably six months or so after you get the award that you sign on the PPA. Relative to project cadence here, as far as new business; it varies obviously quarter to quarter, but I would say that we're being pretty thoughtful on which projects we close and things like that. And I would say that our pipeline of activity is as high as it's ever been, it's diverse -- it's diverse as it's ever been. And we have annual bookings numbers that we try to do to support basically the production plan that we lay out for ourselves.

Just so I’m clear, you're not seeing any of your project awards not turn into backlog, and the pacing of the sales pipeline moving into the next stage is pretty steady at this point, and you guys are being judicious about that? Just, so I'm clear on that.

Again Colin, we don't -- I mean, our experience is – there’s two parts of that; one is when we get a contract, it always ends up getting finalized, number one. Number two, we always build them. So even in the execution portion of this, which is interconnection and things like that, again, we do our homework ahead of time, so they always get done.

And then in terms of the diversity of capital available for these projects, certainly we've seen in any number of other transactions in the last year, a lot of money chasing these projects. Can you talk a little bit about the pool of folks that you're talking to, and how quickly that process is moving towards some of the financing? And certainly, as you will be able to integrate some tax equity, the economic trends [ph] on these projects are going to change pretty dramatically, how close are you guys to being able to start finalizing some additional financing sources to move some of these things forward?

As I said in my prepared remarks, we are seeing a diverse interest in project financing, obviously announced the sale of the Trinity College project this quarter to -- in the fourth quarter to AEP, so that's obviously an example of a potential buyer of projects. We've had interest from utilities, from banks, from specialty lenders, tax equity as you mentioned. Given the size and depth of our portfolio, it's attracting a lot of interest. We will be judicious about how we put a portfolio financing plan in place, but again, as I said, we expect to announce traction on that here in the next couple months.

Your next question comes from Jeff Osborne with Cowen & Company.

Maybe just following up on one of Colin's line of questioning; as in the past presentations, you guys had a great graphic that showed the projects in the pipeline, some of the PPAs and some that didn't, and then the expected time of construction and when it would be completed. I just want to better get a sense of -- as we look out to 2019 and 2020, are any of those projects moving faster or slower than the past graphic that you had three months ago?

Yes, we have all that disclosure in our 10-Q on pace of project execution, but I can walk and I tried to do some of this in my prepared remarks, but I can walk down the list as we talk here. So with Trinity coming out of our project awards, we currently have 83 megawatts of projects that we’re executing on over time. The new news this quarter was we added the 22 megawatts of Connecticut projects, the projects that we expect to come online this year in calendar 2018 are the Triangle Street project, 3.7 megawatt project, that's a 60% efficient project that's here in Connecticut. In 2019, we expect the Groton sub-base to come online, the Tulare and Bolthouse projects to also come online, those are in California. So the Groton project is 7.4 megawatts, Tulare is 2.8 megawatt, and Bolthouse is 5 megawatts. And then beyond that, you have the Toyota, LIPA, and Connecticut projects that would be late 2019 and then into 2020, but we do have the dates and the off-takers laid out in our 10-Q for those.

Yes, I'm seeing it now, so that's helpful. I appreciate that. I just wanted to make sure that there wasn't any major delays but I hadn't put through the Q prior to the call. And then in terms of the OpEx run rate, as your hiring folks, the OpEx this quarter was a bit higher than we are modeling, is this the new normal at these levels? And then, as you hire more people that all ramp-up through March or were there any onetime items in OpEx this quarter? I know you had a service gross margin issue but I just want to make sure there weren't any onetime issues in either SG&A or R&D?

No, we expect to get leverage out of SG&A and R&D as we continue to grow. A little bit more product development activities this quarter is some of our engineers are focused on that rather than commercial activities but the range that we're in is where we think we should be in the future. There is always going to be a little bit of growth for inflation and things like that but we don't see any radical changes in OpEx as we grow into next year.

Mike, I was wondering if you could just quantify roughly or exactly the under-absorptions that you highlighted just as you move from 25 megawatts to 55 megawatts; is there a way to think about what the negative overhang is on a quarterly…

Yes, and we have that in our -- I tried to highlight that in my remarks and it's in the release. It's $3 million is what it was this quarter. When you get back up over 50 megawatts, that should all go away and you will -- you see it all, right now it's very apparent in the product cost of sales lines but that drag on overhead should go away as we ramp up.

And the last one I had was just on the -- you've highlighted for several quarters now the flexibility that the company has in terms of capital needed for these projects from tax equity to debt equity in construction financing; can you just reflect on the recent capital raise and specifically what that funding would be used for just given the flexibility that you had, as well as it's timing coincidentally with the project sales at Trinity?

Sure. So as you mentioned, we recently closed on a convertible preferred capital raise, brought $25 million in for the company. As we've said in the past, we do expect a portion of projects as they are in the construction phase to be funded from working capital, you would expect to get construction and term financing in the 70% plus range but where we sat today, we wanted to just make sure we had strong balance sheet as we both execute on the production ramp and then get into portfolio project financing here as we go forward.

[Operator Instructions] Your next question comes from Carter Driscoll with B. Riley FBR.

I guess my first question, can you help us with decision-making process to sell a project that you had been contemplating keeping on balance sheet? I mean is that a pure ROI decision? Is it at all related to the financing, maybe or -- purchased [ph] at lower or a significantly lower cost of capital and maybe it makes some more sense and that factors into it; just trying to get a sense of the priorities that would determine keeping on balance sheet versus a project sale or cash recycling, things of that nature? Thank you.

Certainly, the quality of our customer in this case played into that but it does obviously come down to economics. We ran a process for this project and as we typically do for all projects, syndication process, seeking both financing terms or selling project outright -- struck a really nice relationship with AEP OnSite Partners, feel like they are a good partner for the company, liked the profile of both the product sale and the long-term service agreement and made the decision for this project to sell in the quarter. This is a project that we had developed and financed on balance sheet, we didn't have any debt [ph], and typically when you sell projects at COD is when you're able to attract the best terms, the customer can obviously monetize the tax benefits right out of the gate and get the full benefit of the operating cash flows upon closing of the transaction. So we are really happy with the transaction, happy to partner with AEP and look forward to additional opportunities with them in the future.

And does that mean, like you said, you're hoping to build a longer term relationship with AEP; does that factor into your desire to selling a project if that's what they would wish to do with it -- is part of the long-term relationship development? Is that a factor in determining the sale?

Yes, sure. I mean one is timing, as Mike said, one is terms. And yes, I mean -- we have a relationship, if you kind of look at it, we have some pretty deep relationships with some pretty big players, that's kind of part of our strategy here, whether it's Exxon or Dominion or AEP. So yes, I think that has a huge benefit to it. Because you know, frankly, when we -- some of these projects, we look at it as a project, they have an overall strategy in some cases to serve these customers or other customers in adjacent spaces as well on things that we don't have. So they look at this overall as a strategic investment, so for sure, that helps our reputation of developing good projects and so on and so forth. I think there is a lot of things that go into it but it clearly is a timing opportunity for us, we're not going to do anything -- we're only going to do it if it makes sense and a lot of factors. And we recycled the capital into developing these other projects which were in fact bigger that Mike was alluding to such as CMEEC and others that are currently under construction.

You talk about maybe the -- I think, maybe the investor community underappreciated the O&M agreement you signed with KOSPO, maybe talk about the economic impact. And then maybe just the relationship typically for given project sale size and a typical O&M agreement, maybe a parameter of threshold on what you could expect if as typically does happen, there is a service agreement component to that project sale, just focus understand from forecasting perspective if we choose to estimate -- again sell future projects?

Carter, you won the award so far for the underestimation of the statement so far. Yes, to say that was underappreciated is absolutely correct. Let me add some color to that. So not only was that contract in itself over $100 million, it was one of the largest utilities in the nation, in Korea, KOSPO. And that plant that we built, it's a beautiful plant; I just came back from there. I spent 2.5 hours with the entire leadership company at KOSPO, including the CEO who if you look at the slide deck is in the picture. And talking about how well that project was designed, how well the project was constructed and project managed, and how we're going to do a 20-year operating agreement for our customer who has 2 gigawatts of power on the same side. So we did that all the right way, the right terms, we'll make money at it, it's a big deal; from a company that's not Korean, I think we were also trying to -- in that whole process, without getting into too much detail, we were also trying to lead in some of the market direction of the country as well. And I think our credibility and the pace at which we did that and the way we did it was extremely helpful for future projects which there are numerous. So our philosophy has always been -- big companies like this is that, bad projects never get better, don't do them but good projects get recognized and then you get more from that; so that's been our philosophy and that's absolutely true from the way we did it but that was -- you know, over $100 million for us, it's good money, but the impact of that from a credibility in the marketplace and market signals is very, very impactful that nobody ever came [indiscernible]. So, thank you for asking the question.

And the second part is, just -- is there a reasonable relationship between size of the project and the O&M agreement we hope to sign? I'm just trying to think like the 20 megawatt project could potentially lead to a similar size O&M agreement in the future or 2.8 or 5; does the relationship hold relative into the scale of projects?

Yes, it does. Everybody's pricing in things might be different Carter, so I want to be careful here. But for sure, I mean, typically if it's a 20-year contract, the value of the build and the plan of the contract is equal if not greater than that and the service agreement is equal if not greater than that. So that's why you want to do the projects right because if you lock yourselves into a bad project, then you have the service agreement that's not good -- that's not a good business proposition. So -- but it's absolutely a big deal, so you don't -- that recurring revenue is pretty nice to have, right; so we're focused on the whole project, not just building the thing.

Couple of clarifications; we talked about PPAs for LIPA; you're talking about calendar 2018 not fiscal?

Sorry Carter, could you repeat that please?

You're anticipating PPAs for the life of projects, was that calendar 4Q '18, not fiscal 4Q?

Yes, Mike was -- I think my comment on -- I did in my comments here but yes, this fall whether I would say in our fiscal year is the plan, yes.

And then the service charge you took, was that related to the same project decision you made due to the impairment from last quarter; I think it was the New York based project, is that correct? And the carry over this quarter, was that…

Yes, we had a project -- it's a legacy project, going back to -- I forget when I got in place but it was a small project, back in the days -- probably goes back 10 years. And frankly, we -- a lot of those early day projects that we did and others did didn't really make a lot of economic sense for the clients, nor for us, but they reviewed as demonstration projects. So that was an amicable termination of a project that no longer made any sense; so that's a non-recurring item, it's done and we would have had that legacy loss if you will on the service line for years to come if we didn't just deal with it, so we dealt with it but the good news is that it was done amicably. And secondly, we -- one thing we did prior to that which I think goes back to Q1 and I don't remember exactly; again, it was another amicable and we got it off of our balance sheet, so we've really cleaned up our service and you will see that in the margin going forward.

Do you anticipate a lot of -- the more types of legacy projects potentially as we look forward?

No, we're at the end of that.

So Exxon construction completed by year end and hopefully COD sometime in the first half '19, is that the timeframe? Any other, maybe more granular update you can give on the progress there as it's been for both sides, both the coal and the gas if done concurrently, is there one or the other that's prioritizing?

So the project itself is starting off coal first, it's -- that was always the plan. Then we have to build it, then we have to do certain testing in certain time and then we'll convert it to gas, same location, just convert it to gas -- we're willing to do that [ph]. As far as the execution of it, construction in '18 into '19 and then depending on that construction schedule, I think we said end of '19 for operation of the plant. But as far as the interest in it and the policy behind it, that's stronger than it's ever been, the policy obviously is frankly figured towards fossil fuels and our issue is to try to clean up that this CO2 and NOX emissions from that which that project is a perfect example off. And then obviously the enthusiasm as I mentioned from the Exxon folks and others to do this on a commercial scale is certainly increasing in interest as well.

Maybe an update your work using solid oxide towards energy storage, obviously been a lot of involvement at least pairing, storage and solar -- going to get a sense of when maybe commercial opportunities to begin to percolate [ph] for your energy storage investments?

Yes, probably in future calls we'll have more to say about solid oxide but there is kind of three things there. One, we will be talking about a power generation installation here shortly that we have installed. Second, you're probably seeing several awards we've gotten probably close to $10 million of awards directly from different portions of the Department of Energy and other areas, so that's all good. And then, we're talking to people putting in proposals for storage using solid oxide and particularly hydrogen is the medium there, basically take power, grade hydrogen, run the hydrogen back through the fuel cell to create power again for the storage part. So I would say that's progressing and the interest levels there for a lot of different people, primarily Carter, as you can imagine utility companies that are seeing a need for longer duration storage. It's a little bit of an education process to be honest because a lot of people when they were asking for storage, were asking for short-term storage because that's all they thought they can get but that's not necessarily what they need. So we've kind of come in the door and said well, perhaps we can give you what you need which helps as part of your future strategy, increasing renewables in your network or whatever, so I would say I'm pleased with that, I don't have anything to announce but we are actively pursuing opportunities for deploying storage using our solid oxide as well.

Lastly, since you were in over Korea, so recently -- talking about the engagement process basically there since it's -- Korea seems to be the most lucrative in terms of the project sizes, at least relative to what you typically done in the U.S., maybe your near-term outlook for potentially adding another project of a similar size or what you did with KOSPO most recently?

I mean, we -- I went there for multiple reasons last week but there is a lot of activity and you need to be thoughtful when you do these things as we have been. And the same sort of things apply here, right, you need to have off-takers for powering racks, you need to have proper financing, so on and so forth. So we're active in -- on a lot of different things over there, everything from power generation like we built for KOSPO to hydrogen, and even perhaps talking at some point about carbon capture. So everything we offer is of interest to that marketplace. Speed is important but doing projects correctly is the most important because you've got long-term relationship with these folks. So I would say that the market is good, the projects tend to be larger in size, 15 megawatts, 20 megawatts, 25 megawatts, 30 megawatts, whatever; and that's because everybody is trying to hit an RPS objective that's dictated by the government. But again I think that on paper it's a good market but the demos and the detail on these things and you got to make sure that you're doing projects, you can get the financing and so on and so forth, and we're on that pretty actively right now.

And there are no further questions at this time. I will turn the call back over to Chip Bottone for closing remarks.

Thank you everybody for joining today. I think we had a broad range of questions, so thank you for the people that ventured to ask them. I think you can kind of see from the comments in the prepared remarks, as well as in responses to the questions that we're moving along -- we're moving forward with the business model that we said with good projects, with good people; and I can tell you that going -- not taking any shortcuts is really the right way to do things and a lot of these projects we're getting, you don't necessarily see it but the locational value, the relationship value we have is going to bode well for us in the future. So, we're clearly in execution mode of what we have in front of us which is pretty substantial. We are very active on -- as I said in my remarks with things in our pipeline and trying to get those to closure and balance us out with the commitments that we have in front of us. Mike and his team have done a great job of looking at the project financing, now they are at stage and we feel really good about that. So all in all, we're moving forward as we said and we look forward to updating you for the full year here I guess later on in the year. So thank you everybody for joining today and have a great day.

And ladies and gentlemen, this concludes today's conference call. You may now disconnect.