FuelCell Energy, Inc. (NASDAQ:FCEL) Q2 2020 Earnings Conference Call June 12, 2020 10:00 AM ET
Tom Gelston – Senior Vice President of Finance and Investor Relations
Jason Few – President, Chief Executive Officer and Chief Commercial Officer
Michael Bishop – Executive Vice President, Chief Financial Officer and Treasurer
Ben Toby – Senior Vice President, Direct Sales and Customer Service
Conference Call Participants
Jeffrey Osborne – Cowen and Company
Eric Stine – Craig-Hallum Capital Group LLC
Colin Rusch – Oppenheimer & Co. Inc.
Pavel Molchanov – Raymond James & Associates, Inc.
Ladies and gentlemen, thank you for standing by, and welcome to Fuel Energy’s Second Quarter 2020 Earnings Call. At this time, participant lines are on mute to prevent any background noise. At that time – after the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]
I would now like to turn the call over to Tom Gelston, Senior Vice President of Finance and Investor Relations. Please go ahead.
Thank you, Michelle. Good morning, everyone, and thank you for joining us on the call today. As a reminder, this call is being recorded. This morning, FuelCell Energy released our financial results for the second quarter of fiscal year 2020, and the earnings release is available on the Investor Relations section of our website at fuelcellenergy.com.
Consistent with our practice, in addition to this call and our press release, we have posted a slide presentation on our website. This webcast is being recorded and will be available for replay on the company’s website approximately two hours after the conclusion of the call.
Before we begin our prepared comments, please direct your attention to the disclosure statement on Slide 2 of the presentation and the disclaimers, including in the press release related to forward-looking statements. 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 continued development, commercialization and financing of its fuel cell technology and its business plans.
These forward-looking statements are intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements made on this call today other than statements of historical facts are forward-looking statements, and include statements regarding our anticipated financial and operational performance.
Forward-looking statements made on this call represent management’s current expectations and are based on information available at the time such statements are made. Forward-looking statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any results predicted, assumed or implied by the forward-looking statements.
We strongly encourage you to review the information and the reports we file with the SEC regarding these risks and uncertainties, in particular, those that are described in the Risk Factors section of our Annual Report on Form-10-K and cautionary statements concerning forward-looking statements disclosures in our Quarterly Report on Form 10-Q. You should also review the section entitled quarterly statement concerning forward-looking statements in this morning’s earnings press release.
During this quarter call, we will use non-GAAP financial measures when talking about the company’s performance and financial condition. In accordance with SEC regulations, you can find a reconciliation of these non-GAAP measures to the comparable GAAP measures in this morning’s earnings press release, and the reconciliation document posted on our Investor Relations portion of our website.
For our call today, I’m joined by Jason Few, FuelCell Energy’s President and Chief Executive Officer; and Mike Bishop, Executive Vice President, Chief Financial Officer and Treasurer. Following our prepared remarks, we will be available to take your questions and be joined by other team members of the leadership team.
I will now hand the call over to Jason for opening remarks. Jason?
Thank you, Tom. Good morning, everyone, and thank you for joining us on the call today. These are unprecedented times.
Before we get started on behalf of the FuelCell Energy team, I want to say that our thoughts and prayers are with those directly impacted by the ongoing global pandemic. And I want to thank the medical professionals, first responders and other essential workers who are bravely performing their jobs under improving, but yet very difficult circumstances.
I will give an update on the impact of COVID-19 on our company later in my prepared remarks. In light of the recent public events, I want to reaffirm FuelCell Energy’s commitment to diversity and inclusion in every aspect of our business. Our commitment to enable the world to live a life empowered by clean energy requires a diverse and talented team. I also want to thank the entire FuelCell Energy team.
During this time of global challenge and uncertainty, we remain focused and committed to continued execution of our Powerhouse strategy. And I’m proud of the team’s dedication and the results we have been able to achieve this quarter.
Last, I want to thank the Board of Directors for its support of our global team and enabling us to retain our team members on payroll with benefits despite our manufacturing facility shutdown, thus, enabling us to hit the ground running upon our reopening.
Coming out of our difficult fiscal 2019, we were poised to execute on our new Powerhouse business strategy. The unexpected onset of COVID-19 has slowed some of the progress we had hoped to make by delaying bids and product solicitations and challenging our sales efforts, as our customers around the world struggle to address the business challenges brought on by this virus.
As businesses slowly reopen and markets rebound, we anticipate a return to our pre-buyer sales efforts and initiatives. As in previous quarters, we have included an overview of the company for those of you who may be less familiar with our business.
On Slide 3, we have a snapshot of our revenue breakdown for our most recent full fiscal year, the fiscal year ended October 31, 2019. During fiscal year 2019, we recorded approximately $61 million of total revenue with the three largest categories: service and licenses, advanced technologies and generation, providing diversified sources of recurring revenue.
I will also highlight some of the well recognized customers shown near the top of the slide, with whom we have multi-year contracts. We anticipate that these existing customers, as well as our future customers, will benefit from the ongoing product enhancements we make to our technology platform, including our extended stack life, which is now up to seven years.
Combined heat and power systems, enabling microgrids, onsite hydrogen generation and future commercialization of our solid oxide platform capabilities to deliver electrolysis, long-duration hydrogen-based energy storage and zero carbon hydrogen power generation.
Moving to Slide 4. Our purpose, which is to enable the world to live a life empowered by clean energy, guides our strategy, our people and the work we do. It also guides our strategic focus and the innovations we’re commercializing. Said simply, it is who we are.
Now, turning to the key takeaways for the quarter on Slide 5. First, overall, we delivered a good second quarter results, but I’m particularly proud of the team’s execution during this period, in which we were faced with unique challenges of the pandemic.
Second, we continue to deliver disciplined management of our operating expenses and improved both our gross margins and operating loss, driven by an increase in our differentiated work on our carbon capture under our JDA with ExxonMobil Research and Engineering.
Third, we continue to execute on our Powerhouse business strategy across our global operating model, resulting in some significant achievements during the quarter. In April, we began commercial operation of the Triangle Street Project in the hometown of our headquarters, Danbury, Connecticut after completion of testing and design optimization.
This represents our first deployment of the SureSource 4000 high electrical efficiency platform and is another demonstration of the power of our platform to deliver distributed generation in an urban setting.
Also, in April, we began site construction of a 1.4-megawatt SureSource 1500 biofuel project with the City of San Bernardino Municipal Water Department in California, which we expect to be commercially operational near the end of calendar 2020.
This project provides yet another operating example of the power of our multi-fuel platform, our proprietary gas cleanup system, and the unique position our SureSource platform occupies as the only carb BG certified distributed generation solution operating on anaerobic digester gas.
In May, we announced a significant energy output milestone by delivering more than 10 million megawatt hours of clean energy across three continents from our SureSource fuel cell power platforms since our first commercial installation in 2003.
On June 7, FuelCell Energy celebrated its 20th-year as a NASDAQ-listed company. I want to thank our Board of Directors, team members, customers and our stockholders for your continued support for FuelCell Energy.
Fourth, to be able to continue executing on our business strategy, despite the business effects of COVID-19, we have taken action to ensure liquidity through the next 12 months by securing a secondary loan commitment from Orion Energy Partners of up to $35 million for working capital and general corporate purposes. Mike will provide additional details during his prepared remarks.
Fifth, consistent with our purpose, we continue to strive to be a leader in sustainability and environmental stewardship. Looking ahead, FuelCell Energy remains focused on four of the largest global energy opportunities. One, distributed baseload generation; two, distributed hydrogen generation; three, carbon capture; and four, our solid oxide platform, which provides electrolysis, hydrogen generation, long-duration hydrogen energy storage, and zero carbon hydrogen power generation.
We continue to believe that carbon capture is key to meeting global goals for reducing the world’s carbon footprint without requiring most of the world to forego technological advancements enabled by abundant energy. We believe that FuelCell Energy’s carbon capture technology is currently the only known method that captures carbon, while simultaneously producing more power.
Together, with ExxonMobil Research and Engineering, we continue to develop our fuel cell technology that has the ability to concentrate CO2 across industrial applications, coal and gas-fired power plants, while also producing power from the fuel cell stack.
And finally, I will give a brief update on how we are managing our business in light of COVID-19. First, we continue to pray for the health and safety of our global team, our customers, friends, neighbors and communities. We took actions in the early days of this crisis prior to the government mandated restrictions to enact safety precautions, including work from home mandates where possible and the closure of our manufacturing operation in Torrington, Connecticut.
We have remained in contact with global team members, suppliers and customers to share information and minimize interruptions to our business plan as much as possible. Now that efforts are underway to reopen society under a controlled plan. We are planning to begin reopening our Torrington, Connecticut manufacturing facility on June 22.
While the shutdown of our manufacturing facility was in effect, we continued the construction of our 7.4-megawatt project at the Navy Submarine Base in Groton, Connecticut and commenced construction at the San Bernardino biofuel project. We will utilize a staggered approach to reopen our offices, and we will continue to remain in compliance with all rules and regulations, including continued use of social distancing protocols and work from home where possible.
We have secured the necessary PPE for all of our team members and we have modified workspaces to promote social distancing. Of course, we will continue to monitor the situation and adjust our operations as necessary.
And now, I will turn the call over to Mike to discuss our financial results in more detail. Mike?
Thank you, Jason. Let’s begin by reviewing the financial metrics for the quarter shown on Slide 7. Second quarter revenue increased by 105%, compared to the second quarter of fiscal 2019 to $18.9 million. The biggest contributor was revenue from service and license agreements, which increased by $4.4 million versus the prior year quarter to $7 million. The increase was driven by revenue recorded on module replacements under customer service agreements.
Revenues from generation increased by $3 million to $4.6 million in the second quarter of fiscal 2020, primarily benefiting from additional revenue associated with the Bridgeport Fuel Cell Park project that we acquired in May of 2019. And the addition of the Tulare BioMAT project, which began commercial operation in December of 2019.
We had 32.6 megawatts of operating power plants in our portfolio as of April 30, 2020, compared to 11.2 megawatts at the end of the second quarter of fiscal year 2019. Increasing the scale of our generation portfolio in order to derive long-term recurring cash flows is a strategic focus of the company.
Advanced – revenue from Advanced Technology contracts increased by $2.3 million to $7.3 million in the quarter due to the addition of revenues from the company’s joint development agreement with ExxonMobil Research and Engineering Company, which was executed during the first quarter of fiscal 2020 and the timing of activity under other existing contracts.
Gross profit was approximately $200,000 for the quarter, compared to a gross loss of $3.6 million in the second quarter of fiscal 2019. Results benefited from increased Advanced Technology work under our joint development agreement with ExxonMobil Research and Engineering Company, as well as lower manufacturing costs, resulting from our reduction in workforce in fiscal 2019, partially offset by approximately $1 million of manufacturing variances due to the shutdown of our Torrington manufacturing facility due to COVID-19 pandemic and a loss from our generation portfolio due to maintenance repairs at several plants during the quarter.
We are disappointed by the results of the generation portfolio in the quarter, which now has eight operating plants. We are striving for operational excellence across the platform and have identified improvement opportunities, which have and will be implemented in future periods.
Operating expenses for the quarter decreased by $5.7 million, or 41% to $8.3 million, compared to $14 million in the same quarter of fiscal 2019. R&D expenses of $1.1 million and administrative and selling expenses of $7.2 million reflects the decreased allocation of resources to internal R&D development, lower headcount and lower legal and consulting costs.
Please turn to Slide 8 for additional detail on financial performance for the quarter. Our net loss attributable to common stockholders was $15.6 million, or negative $0.07 per basic and diluted share in the second quarter of 2020, compared to a net loss attributable to common stockholders of $22.9 million, or negative $2.06 per basic and diluted share in the second quarter of 2019.
The lower net loss per common share is primarily due to an increase in the weighted average shares outstanding, due to the issuances since April 30, 2019. Results for the quarter also include a non-cash mark-to-market accounting expense of $3.4 million, or approximately $0.02 per share related to the fair value liability associated with the warrants issued under our credit agreement with Orion Energy Partners.
Net loss totaled $14.8 million, compared to a net loss of $19.5 million in the second quarter of last year. In the second quarter, loss from operations improved to $8.1 million, compared to a loss from operations of $17.6 million in the second quarter of fiscal 2019.
Adjusted EBITDA improved to negative $3.3 million, compared to adjusted EBITDA of negative $14.5 million in the second quarter of fiscal 2019, primarily reflecting the lower expenses and improved gross profit I previously discussed.
Moving to the chart in the center. As of April 30, 2020, cash, restricted cash and cash equivalents totaled $73.4 million, of which $44.3 million was restricted cash and cash equivalents.
Unrestricted cash and cash equivalents, as presented on our consolidated balance sheet, includes project cash and cash equivalents borrowed under our credit agreement with Orion Energy Partners, which can only be used by our project subsidiaries for project construction, purchase of equipment and working capital for projects approved under the credit agreement. This totaled $18.6 million as of April 30, 2020, and is highlighted by the green bar in the chart.
We also have unrestricted in cash and cash equivalents, which can be used by the company for general corporate purposes, including working capital at the corporate level. This balance totaled $10.5 million as of April 30, 2020, and is highlighted by the dark blue bar at the bottom of the chart. This includes proceeds of the PPP Note received during the quarter.
In total, as of April 30, 2020, unrestricted cash and cash equivalents equaled approximately $29.1 million, compared to $9.4 million as of April 31, 2019. During the quarter, we completed the $14.4 million sale-leaseback transaction with Crestmark Equipment Finance for the 2.8-megawatt biogas fueled fuel cell power plant, located at the wastewater treatment plant in Tulare, California.
Additionally, under the CARES Act created in response to the COVID-19 pandemic, in April, we entered into a Paycheck Protection Program loan, or PPP Note and received total proceeds of approximately $6.5 million. In accordance with the requirements of the CARES Act, the company is using the proceeds primarily for payroll costs.
As we previously disclosed, we have taken steps to prioritize the health and safety of our team members by temporarily suspending operations at our Torrington manufacturing facility, and we have not implemented any furlough, layoff or shared work programs.
Excluding project cash and cash equivalents and the remaining balance of approximately $6 million under the PPP Note, unrestricted cash and cash equivalents totaled $4.5 million as of April 30, 2020, compared to $9.4 million as of October 31, 2019.
Finally, turning to the backlog chart on the right side of the slide, we finished the quarter with backlog of $1.34 billion. This is an $80.8 million increase over the end of the second quarter of fiscal 2019. Total backlog is comprised of $1.1 billion for generation, $183 million for service and license and $57 million under Advanced Technology contracts.
Next, turning to Slide 9, I would like to highlight some of the recent steps we have taken to provide additional liquidity to execute on our business plan, which includes building out our backlog of generation projects.
Under our business model, as projects become operational, we expect to close on long-term financing at an efficient cost of capital, which recycles cash back to the company to be used to pay down the Orion credit facility or to be redeployed into other projects with the consent of the agent and the lender under the Orion Facility.
An example of this occurred in the quarter, whereby in February, we closed on the 10-year sale-leaseback financing transaction with Crestmark Equipment Finance. This transaction has allowed us to retain the Tulare BioMAT project in our generation portfolio, which in turn, provides long-term return recurring cash flows. $6.5 million of the net proceeds from this transaction were deposited into the Orion project proceeds account, which is a restricted cash account on the company’s balance sheet.
These proceeds are for future distribution at the discretion of the agent and the lenders under the Orion Facility to construct our projects, for working capital support or for repayment of principal due to Orion.
Later in the quarter, on April 30, we entered into the fourth amendment of the Orion credit agreement, which permitted the release of up to $3.5 million of restricted cash from the project proceeds account to be used to fund construction of the company’s 1.4-megawatt biogas fuel project at the wastewater treatment plant in San Bernardino, California, which began construction this quarter. $2.3 million of the proceeds were released subsequent to quarter-end and the balance may be released by Orion when the company achieves certain project milestones.
Once this project achieves commercial operation, we expect to source long-term financing for the asset, which would again recycle capital back to the business to pay down on Orion or be redeployed into other projects with the consent of the agent and the lender under the Orion Facility.
Finally, on the slide, subsequent to quarter-end, in order to alleviate substantial doubt about the company’s ability to continue as a going concern, today, we are announcing that we have entered into a $35 million secondary financing facility through a fifth amendment to our existing $200 million credit agreement with Orion Energy Partners.
Pursuant to the fifth amendment, the lenders have committed to make a secondary facility loans of up to an aggregate amount of $35 million available to the company for general corporate purposes. These loans may be drawn down between now and September 14, 2020. Any drawn amounts may be fully repaid on or before September 1 2021.
In exchange for this new loan commitment, the company will pay to the lenders an option premium of $1 million on the earlier of September 14, 2020, and the date of full repayment of all amounts drawn under the facility.
Additionally, for each draw made on the secondary facility loans, the company shall pay the lenders an initial draw discount of 5% of the amount drawn. In the event that full repayment of all amounts drawn under the secondary facility loans has not occurred within six months of the initial draw. The company must pay the lenders an additional draw discount in the amount of 10% of any amount outstanding as of such date.
In the event that full repayment has not occurred within nine months of the date of the initial draw, the company must pay the lenders an additional draw discount in the amount of 20% of any amount outstanding at such date.
In connection with Orion making this new commitment, the company is providing additional collateral to the lenders by a pledge of the company’s intellectual property assets. All leans on the company’s intellectual property will be released upon full payment of all amounts drawn on the secondary facility loans or upon termination of the commitment if no amounts are drawn.
The company is required to prepay any draws on the secondary facility in advance that the company issues or incurs any new indebtedness other than permitted indebtedness as defined in the Orion credit agreement or issues or sells equity, which includes any capital stock or any instrument security or right that is convertible into or exercisable or exchangeable for capital stock.
Under these two scenarios, 100% of the net proceeds of any new debt issuance and 50% of the – of net proceeds of any equity issuance must be applied to pay down the outstanding amounts under the secondary facility loans. A complete description of the fifth amendment is included in our second quarter 10-Q, which was filed this morning.
In addition to this new financing with Orion, the company continues to – I’m sorry, in addition to this new facility with Orion, the company continues to evaluate new debt and equity financing options as we execute on our Powerhouse business strategy across all of our product and technology platforms.
To wrap up my comments, on balance, we are pleased with the overall progress that we made in the quarter in a challenging business environment. We look forward to continuing to execute against our backlog, as well as other future growth opportunities as we emerge from the pandemic.
I will now turn the call back over to Jason.
Thank you, Mike. Next on Slide 10, I want to provide an update on the Powerhouse business strategy that we announced earlier this year. The first phase of our plan was to transform in order to build a solid financial foundation on which to grow the business.
Over the past several months, beginning just prior to when I assumed the role of CEO in August of 2019, we undertook a number of restructuring initiatives to strengthen our financial footing in order to support future phases of our strategy.
Prior to COVID-19, we were focused on strengthening our business by optimizing capital deployment and developing new business. In the example shared earlier by Mike, you can see that despite COVID-19 challenges, this remains an ongoing evolving process, with goals of improving our cost of capital over time and working hard toward ultimately achieving profitability.
We will continue to focus on disciplined capital deployment and securing lower cost, long-term financing and tax equity financing for completed generation projects. Pursuing commercial excellence is a never ceasing focus as we seek to strengthen our customer relationships, establish new customer relationships, and build a world-class customer-centric reputation by keeping close to the markets we serve and respond to the needs of our customers.
Our priority is to develop a deep strategic partnership with our existing customers, as we also develop such relationships with future customers. Operational excellence is at the heart of our success, as we strive to execute on projects, manufacturing, and customer service.
We have implemented cost reductions over the past year that were evident in the results reported today. As we continue to make strides toward profitability, reducing costs while adhering to safety and product quality standards goes hand in hand with our pursuit of operational excellence.
As we look to continue our growth, as we emerge from the pandemic, we have an opportunity to increase product sales in local and global markets, where we have been absent. Innovation is our DNA it’s what FuelCell Energy has done over its 50-year history.
We are constantly working toward increasing product life and reliability and exploiting our competitive advantage with multi-use applications, multi-fuel applications, our scalable platform and multi-feature capabilities. We have commercial products to meet distributed generation and distributed hydrogen applications.
We also intend to develop and commercialize our advanced technology platforms across carbon capture, long-duration hydrogen based energy storage, and zero carbon hydrogen power generation.
To expand upon our segment leadership, we will seek to capitalize upon our core strengths of delivering combined heat and power, utilizing available biofuels for power production, enabling microgrids, large megawatt platforms, generating distributed hydrogen for industry, transportation, and ultimately, energy storage and power generation.
Underpinning our efforts is the education of commercial and industrial power consumers, governments, utilities, as well as the general population on how clean energy can advance societal progress, while addressing global sustainability goals. We’re working to ensure that policymakers, environmental advocates, and consumers understand the environmental, security, resiliency and reliability benefits that are possible with FuelCell Energy’s platforms.
To expand our geographic markets, we are collaborating with channel partners on pan-European opportunities, including sub megawatt applications. We also remain committed to regaining access to markets across Asia.
There is a growing global appreciation for our technology platforms. They’re multi-feature capabilities ranging from use of on type biofuels, microgrid applications, carbon capture and hydrogen. We intend that international growth will be part of our go-forward strategy.
Turning to Slide 11. As I’ve outlined, executing on our project backlog is foundational to our long-term success. As mentioned earlier, onsite construction has commenced on our 1.4 megawatt biofuel project with the San Bernardino Municipal Water Department in California. Seen here is the trenching and pipe work, which is well underway.
Next up, for onsite project mobilization. There’s our 7.4-megawatt project in Yaphank, Long Island, New York. We have included a rendering of what this site is expected to look like upon completion, and we look forward to bringing clean reliable baseload power to reality on Long Island.
We also continue to focus on commercializing advanced technologies, including carbon capture under our joint development agreement with ExxonMobil and Engineering Company.
We continue to advance the commercial development of our solid oxide technology through research and development, cooperative agreements with the U.S. Department of Energy. We are excited about our potential to revolutionize long-duration energy storage and better integrate intermittent sources of power into a complex grid of tomorrow.
Our tri-gen SureSource platform delivers three value streams. First, our platform delivers clean energy; second, the thermal energy and naturally produced water on our platform can be used as a source of hot water, steam and/or heating and cooling applications; and third, our tri-gen platform generate hydrogen for use in transportation and other industrial applications.
Next, on Slide 12, we want to give an update on our long-term targets and goals in light of how the COVID-19 pandemic has created some disruption and macroeconomic uncertainty. These targets and goals are intended to add context to our long-term strategy. And therefore, we are looking past the current economic uncertainty with a time horizon stretching to fiscal year 2022.
Given our current revenue backlog and our expectation for increasing demand as the world emerges from restrictions imposed by the pandemic and the performance and economics of our technology continue to improve, we have no changes at this time to our long-term growth expectations.
Key to achieving the plan is the continued execution of our project backlog and achieving commercial operation for each of those projects, which is then expected to deliver recurring revenue for the company to power generation and long-term service agreement revenues.
On Slide 13, I would like to review our key investment highlights for FuelCell Energy. As discussed in previous quarters, we arranged for access to construction financing for our projects through our $200 million credit facility with Orion Energy Partners, which we expect to assist us in bringing our projects to commercial operation that are expected to generate long-term recurring generation and service revenue.
We continue to look for opportunities to enhance our liquidity and reduce our cost of capital. We have an outstanding organization that is focused on executing on our projects, achieving financial milestones, increasing operational efficiencies, while living our core purpose. And we are working to implement our Powerhouse business strategy to transform, strengthen and grow our company for the long-term.
I will conclude my prepared remarks today by noting that it has been over a year-and-a-half since I joined the Board of Directors and about nine months since I assumed the role of President, Chief Executive Officer and Chief Commercial Officer.
During this time, the FuelCell Energy team has embarked on an ambitious plan to restructure and reimagine the company to improve our perception in the eyes of our customers and partners and restore pride in this great American manufacturing company to reposition it for the future.
While we set an aggressive agenda over the past 12 months to lay the foundation for FuelCell Energy’s turnaround, I’m pleased that we have renewed energy inside our organization, despite the challenges presented by the global pandemic and the cross-functional collaboration by which we are advancing our purpose.
This concludes our formal remarks. Before we begin the Q&A, I want to introduce a few more team members who are on the call with Tom, Mike and me. We are joined by Mike Lisowski, EVP and COO; Tony Leo, EVP and CTO; Joe Crossman, SVP Finance; and Ben Toby, SVP, Direct Sales.
I will now turn it over to Michelle to begin Q&A.
Okay. [Operator Instructions] Your first question will come from Jeff Osborne from Cowen and Company. Your line is open.
Hey, good morning, guys. Jason and Mike, I was wondering if you could touch on the Orion Facility. How much of the $200 million is withdrawn? And have you started the six-month clock on the $35 million?
Good morning, Jeff. It’s Mike. I’ll take that one. So we drew down $80 million under the Orion Facility in – on October 31 and then in November of 2019. Those proceeds were primarily used for construction of our projects and process, including the Groton project.
Today, we announced that we entered into a secondary loan facility with Orion for $35 million that can be used for general corporate purposes, and we have not drawn down anything under that facility at this point.
Okay. And then on the generation side, you talked about some challenges there. Can you just touch on the nature of those and what you’re doing to mitigate them?
Sure. So during the quarter – so just to kind of reset here. Currently, we have eight plants operating in our generation portfolio. We brought on the Tulare plant at the beginning of – or the end of October, I’m sorry, the end of December of last year.
During the quarter, we had several plants, which had maintenance items that we addressed and we’re doing an overall review of the portfolio and continue to make improvements in the portfolio and expect improving operations going forward.
Okay. Two other quick ones if I could. One is on the – you mentioned manufacturing costs because of COVID, I think, $1 million impacted you in the April quarter. Should we assume a similar amount for the current quarter?
So there was $1 million additional expense in the quarter related to COVID-19, related to the manufacturing shutdown of the Torrington facility. That’s really a function of unabsorbed overhead, given that we weren’t producing anything, as Jason said in his prepared remarks, we intend to bring the factory back up starting in at the end of June, June 22. That will be a slow ramp, so I would expect to see some impact in the quarter and the exact amount, TBD.
Okay. And then I might have missed it. But in the Q or the presentation, you didn’t have the COD dates for some of the projects as the table used to provide in the past. Can you just talk about the near-term lens between Groton and Yaphank and the timing of those as COVID has pushed those out by months, weeks, quarters? It was unclear just what the timing is?
Sure. So, we did not want to – given the uncertainty that’s out there, we did not want to be overly specific about exact dates of when the projects will come online. But as we said, we have 40.6 megawatts of projects that are currently in the – to be constructed backlog. The ones that are currently in construction right now are the Groton project, that’s very far along. We’ve included photos of that in the presentation. The San Bernardino project, as we announced this quarter, is now under construction, as well as the LIPA Yaphank project, 7.4 megawatt project, which is active in Long Island.
Got it. Thank you.
And your next question will come from Eric Stine from Craig-Hallum. Your line is open.
Good morning, everyone.
Good morning, Eric.
So – good morning. Just curious on the generation portfolio. Obviously, you’re making progress there. But any thoughts on potentially selling any of those projects, obviously, that would set back your plans there in terms of EBITDA but would also help the balance sheet in light of some of the challenges you’ve got at the present time?
Sure. Good morning, Eric. This is Mike. So the company has had a long-term strategic focus in building out our generation portfolio, so that we can benefit from the long-term recurring cash flows of that portfolio. We’ve made significant progress in having over 30 megawatts now on the balance sheet with higher revenue from last year and higher EBITDA from last year, and expect to continue to grow that portfolio. So that, that portfolio can provide the sustainable cash flows to ultimately get the company to EBITDA positive.
That said, the company is always evaluating capital priorities. We are continuing down our current path of building out projects and keeping them on balance sheet. But as we evaluate projects, there could be opportunities in the future to sell what we’re currently building out or potentially what’s on the balance sheet. But no plans as we sit here today to do that.
We’re fortunate to have a $200 million credit facility in place with Orion, we’re strategically aligned with them to build out this portfolio. And then we’ve also demonstrated that we can, once projects hit commercial operation, we can bring in efficient capital to recycle the construction financing and reinvest it back into the business.
And, Eric, I would just add to that, that as you look at what we are doing as part of our overall transformation plan and the opportunities that we’re pursuing, for example, in Europe, I think, you will see where part of our approach in that market will be fairly balanced between on balance sheet opportunities and selling projects. And as we develop new projects and our pipeline begins to convert, that same evaluation for each project will be part of that process.
Got it. Okay, that’s helpful. Maybe just turning to carbon capture. I know originally, way back when that – when the first agreement was inked there, you targeted a pilot project with Alabama Power, and I know that, that sense kind of been tabled. Just curious what – I mean, obviously, there are next steps planned. Maybe any details you can share as to what those next steps may be with Exxon?
Yes. So we continue to move forward with the JDA2 with Exxon. And the goal of that is to prove out the technical milestones that we’ve outlined in that program, and then to move from that phase to a demonstration project, which Exxon has publicly talked about as potentially being at one of their facilities in Rotterdam.
Okay. And I have seen – I’ve seen that, but not – I mean, any thoughts on timing, or is that something to – still to be determined?
Not prepared to talk about timing right now, Eric, but – because obviously that’s in cooperation with Exxon and aligning both of our plans around that.
Okay. That was worth a try. Maybe last one for me. Just I’d love an update when you’re talking about looking at international markets, I’d love an update anything you can share on POSCO and where things stand in kind of the negotiations with the agreement breach that they have made?
Yes. So, Eric, we – we’ve obviously made public through filings. Some of the things that are going on with POSCO at this time, we’re not prepared to make an additional statement. I will tell you, though, when we are, we will certainly issue an 8-K and inform the market of where we are with POSCO.
Okay. Thank you.
Your next question comes from Colin Rusch from Oppenheimer. Your line is open.
Thanks so much, guys. I’d love to get a little bit more detail on the sales pipeline. Obviously, you guys have put some effort into that. I would love to see what the early returns are in terms of entering some of the new geographies, some of the traction on the incremental product offerings that you guys are going to bring out? And then also, just the order magnitude on number of clients and how those clients are progressing through the sales funnel?
Colin, good morning. How are you? This is Jason. I’ll make a few comments and then I’ll turn it over to Ben Toby to give you more of a sense of customers and what he has seen in the market.
As a – what we’ve done in terms of our go-to-market strategy is really think about how do we think about partnerships as we look at international markets, and how we structure channel and/or distribution relationships, so that’s been a big effort and focus for us.
Secondly, we’ve really thought about how we position our product against a set of applications where we think we have really strong competitive differentiation. That’s obviously around applications ranging from the use of biofuels, distributed generation, distributed hydrogen, how we address opportunities where thermal energy is an important part of the customer solution.
And then also, as we think about – if you think about the European market, where we have sub megawatt products, than how that – our platforms become part of the overall fabric of the customers’ operation, like we’ve demonstrated with the Radisson Blu Hotel, where we’re integrated into the facility. We provide all of the electricity, all of the thermal energy needed for hot water and heating for the hotel.
But I’ll ask Ben to maybe give you a sense of how customers are responding to us now versus maybe how customers were responding to us 12 months ago.
Sure. Be happy to. Good morning, Colin. Ben Toby speaking. I think that the customer response is increasingly enthusiastic to our products. We are known as a solutions provider that delivers the highest possible efficiency when it comes to converting fuel into useful electricity and heat. We’re known as a provider of renewable energy via biogas. And we’re also known as somebody who has been in the market delivering solutions to these traditional applications for a long time.
What is increasing now is an awareness of the uniqueness of our applications around renewable electricity delivery and particularly around hydrogen and carbon capture. We’re getting a lot more awareness and I would say traction in those opportunities, where we’re speaking to folks around how to convert sort of advanced applications into today’s opportunities.
And so, I think, it’s – each market segment, each geography has unique attributes that are strengths that we can go for. And those are the ones that we’re trying to uncover. But I’m very optimistic about the sales pipeline as it’s continuing to unfold, and we’ll see good results going forward.
Great. I’ll have some follow-ups afterwards. Just turning into some of the refine of assets. I would love to understand kind of how the finance market is trending for you guys? Obviously, there’s a long history with the assets. But your ability to recycle capital, would love to understand how the relationships are developing with lenders in terms of repeatability of some of these deals and comfort level with the assets to just simplify some of the events sometimes as you go forward?
Sure, Colin, it’s Mike. I’ll take that one and good morning. So I start off by saying, we continue to have a very strong relationship with Orion. You can see in the quarter that we recycled the capital from the Crestmark financing into the San Bernardino projects and we’re able to pull down financing for that and entered into an additional $35 million financing facility with them.
At the project level, continue to have strong dialogue with existing and potential new lenders. And obviously, the next project up is the Groton Sub-Base Project in dialogue with folks on that. Activity level is quite high. And we continue to anticipate that as projects hit COD, we will be able to bring in efficient cost of capital using a combination of tax equity and long-term debt.
I think, Colin, just to add to that. I mean, one of the important things is, I think, if you look at the customers for which we’re executing these projects with the very strong customers where there’s a lot of comfort from long-term lenders with the credit quality of the customers that we’re doing business with.
Perfect. Thanks, guys.
And our final question for today will come from Pavel Molchanov from Raymond James. Your line is open.
Thank you for taking the question. When you talk about more than a $1 billion of backlog in the generation portfolio. Can you split that apart between natural gas or other conventional project versus biogas and landfill gas on the other side?
Yes, I think, Mike, I don’t know if you’ve got. We can certainly talk about which projects are biofuel projects and which projects are natural gas projects and then try to give you some way to think about it.
Yes. So good morning, Pavel. It’s Mike and thanks for joining. So if you look at our generation backlog, we have about $1.1 billion of generation backlog. Predominantly, natural gas, given that these are utility scale projects, if you look at the projects, Bridgeport project, 15-megawatt project, that’s a long-term PPA with Eversource, that’s a natural gas, the Groton Sub Base Projects, 7.4 megawatts, natural gas and, of course, the the life of project.
But when you just follow-on to some advanced projects, when you look at are behind the meter projects, the Tulare BioMAT project is a great example, that’s using renewable biofuels from the wastewater treatment facility. And then, of course, our Toyota hydrogen project, that’s a BioMAT project as well. S I’d say, from a dollar perspective, more weighted towards NG, but certainly a significant piece here also on the biogas side as well.
Thanks. That’s helpful. In that context, let me ask about kind of the European dimension of the story. Historically, Europe has been a pretty small part of your revenue mix. But now, we’re seeing more and more headlines about the European Green deal, net zero target by 2050, kind of an all of the above story. I’m curious if – with that as the backdrop if you’re seeing more potential traction from European customers in any of those facets of the business?
Yes, Pavel, this is Jason Yes, we are. And I think if you look across kind of a pan European market, there are certainly certain markets where there is strong interest in terms of our biofuel capability, and particularly the proprietary gas cleanup capability that we have, given the fact that we don’t need to get biofuels to a pipeline quality gas to be able to use that in our platform. So very strong interest there.
Secondly, as you are likely alluding to is the interest around hydrogen in European markets. So there’s a lot of interest in terms of our capabilities on our tri-gen platform to just – for distributed hydrogen to be part of how they’re thinking about hydrogen infrastructure.
And then certainly, as we continue to work on the commercialization of our solid oxide technology around electrolysis and hydrogen energy storage, that’s certainly a big part of how they’re thinking about planning for their energy grid of the future.
So I would say today and it all has been the comment as well, that the understanding that customers are starting to get about, I talked about the four global energy opportunities that we’re focused on: distributed generation, distributed hydrogen, carbon capture, and electrolysis and long duration energy storage via hydrogen and then hydrogen power generation.
The greater awareness that we build around the fact that we’ve got technology today, that’s commercial across two of those. We’re well advanced in what we’re doing around carbon capture. And then we’ve demonstrated the ability that we have on our solid oxide platform. That realization is driving strong interest from customers on – about our company in Europe. And I think Ben is seeing that in the conversations we’re having with customers.
Absolutely, Pavel, Ben Toby speaking. I would say, not only do we continue to deploy our direct sale model to originate new business in Europe ourselves and turn it up really good opportunities in Europe, but we’re also cultivating increasingly a very active channel strategy. They’re having really good conversations with smart folks who are well positioned to take advantage of some of the applications that Jason was talking about.
I would just make one additional point. And one of the themes that we’re doing is, there’s a lot of ambitious goals out there on the table. In the immediate near-term, you got to find a way to pay for them. So we’re delivering projects that are cash flow positive from day one that going – that removes carbon, because we’re lower than the CO2 footprint on the grids now. But as you go forward, you can retrofit and adapt with that same capital asset to increase your carbon footprint going forward.
So that’s also attractive to the folks that we’re talking to over there. But you make a great point in is, I’m seeing Europe in the leadership position that they hadn’t previously, at least in my view, hadn’t occupied, but they definitely are increasingly doing so.
I appreciate the color, guys. Thank you.
I now turn the call back over to Jason Few for his remarks.
Thank you. I would like to close today by again extending a heartfelt thanks from all of us at FuelCell Energy to the healthcare professionals and other essential workers around the world who have been on the frontlines during the pandemic. I also want to say that I’m proud of all of the FuelCell Energy team has been able to accomplish, especially over the past quarter, despite the COVID challenges we have faced.
I’m very excited about the future and our work to deliver on our purpose to enable the world to live a life empowered by clean energy. Thank you, everyone, for participating on our earnings call today and for your interest in FuelCell Energy. If you have any follow-up questions, please don’t hesitate to contact us. Thank you.
Thank you, everyone. This will conclude today’s conference call. You may now disconnect.