Fuelcell Energy Inc Q2 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the FuelCell Energy Second Quarter of 2021 Financial Results and Business Update Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-session. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Tom Gelston, Senior Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Jason and good morning everyone. Thank you for joining us on today's call. As a reminder, this call is being recorded. This morning, FuelCell Energy released our financial results for the second quarter of fiscal year 2021, and the earnings press 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 will post 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 we conclude the call. Before we begin our prepared comments, please direct your attention to the disclosure statement on slide two of the presentation and the disclaimers included 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 continuing development, commercialization, and financing of its FuelCell 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 in 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 the cautionary statement concerning forward-looking statements disclosed in our quarterly reports on Form 10-Q. You should also review the section entitled Cautionary Statements considering forward-looking statements in this morning's earnings press release. During this call, we'll 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 the Investor Relations portion of our website. On 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 members of the leadership team. I'll now like to hand the call over to Jason for opening remarks.

Thank you, Tom, and good morning, everyone. Thanks for joining us on our call today. We remain optimistic about the continuing momentum behind the global energy transition and expect to play an important role with our primary technologies that include distributed generation, distributed hydrogen, long duration hydrogen energy storage, and carbon capture. We are firmly committed to working hard to achieve revenue growth over time by continuing to focus on our turnaround and delivering proprietary technology solutions that we believe address customer energy needs and assist in decarbonization. For anyone who may be new to the story, we have included a company overview shown on slide three. Looking at the full year fiscal 2020, which ended on October 31st, we achieved revenue of $71 million, a double-digit increase over the prior year. Our three largest revenue categories are service and licenses, advanced technologies, and generation, all of which represent diversified sources of recurring revenue under multi-year contracts with investment-grade customers. Looking ahead, we are focusing on opportunities to generate meaningful revenues from product sales. We see opportunities in markets, including the U.S., Asia, and select countries across Europe, and even domestically with certain customers who prefer to own the FuelCell platform. Under our powerhouse business strategy, we have made it a priority to target product sales. We have been taking steps to rebuild our business development and go-to-market capabilities as an essential step in strengthening the pillar of our powerhouse business strategy to ultimately support growth, recruit and onboard strategic talent, focus on market segments that deliver long-term growth opportunities with repeatable business in carbon capture and separation and hydrogen applications, and reenter target global markets and build client relationships. We have many customers highlighted here on the slide who are utilizing our multi-featured FuelCell platforms. Many of these platforms integrate combined heat and power capabilities, creating extremely high energy efficiency levels. While other installations enable microgrids, keeping central resources powered and enhancing grid resiliency and reliability. Some applications utilize onsite biofuels resulting in carbon-neutral to carbon-negative power. Prior to moving on to discuss our corporate purpose, I want to address our quarterly results. Certainly, we are not satisfied with the financial results that the company produced this quarter. If you have participated in previous earnings calls, you've heard me discuss the saving ratio. We continue to concentrate on improving the saving ratio across our organization. While our strategy implementation and pivoting to the growth phase was expected to be a process, we are not pleased with our saving ratio this quarter and the results that we're reporting this morning. However, I want to emphasize that the financial results are a snapshot and not a complete reflection of the hard work and progress we're making in executing our powerhouse business strategy. We will cover some of these actions and investments in the coming slides. Now turning to slide four. As a company, we are committed to our purpose of enabling the world to live a life powered by clean energy. The world will always need reliable, always-on power that is created in an environmentally responsible manner, as we are periodically reminded by extreme weather and other events. Grid reliability remains a critical issue. FuelCell Energy is uniquely positioned to assist customers on their decarbonization journey and meet the grid reliability challenge with our broad product portfolio. It is important to highlight that we do not subscribe to the philosophy that the goal of decarbonization requires deindustrialization or that developing countries around the world cannot participate in industrialized societies through their own economic development. Instead, we look to deploy our unique and differentiated energy solutions to deliver decarbonized power as a necessary complement to intermittent renewables in a manner that sustains high standards of living and economic growth while protecting the environment and adapting to new resource challenges. This purpose drives our strategic focus and the work we do. Next, I would like to turn your attention to some key messages for the quarter shown on slide five. The first is that we continue to make steady progress against our backlog of $1.3 billion as we execute our powerhouse business strategy. In terms of rated capacity completion of these projects, it will add 43.5 megawatts, more than doubling our current generation portfolio of 32.6 megawatts. Our backlog now includes a power purchase agreement for a newly awarded 2.8 megawatt clean energy facility project in Derby, Connecticut. I am pleased to announce that we are close to resolving the interconnection issues on a 7.4-megawatt project at the U.S. Naval Submarine Base in Groton, Connecticut, with two parties prepared to execute the current form of interconnect agreement, one of which is FuelCell Energy. The project is entering the final stages of construction and nearing completion, with commercial operations currently expected in late summer, assuming final signature of the interconnection agreement is achieved. Related to project opportunities in the State of Connecticut, the Connecticut House of Representatives has approved the passage of House Bill 6524 by a 143 to one margin on May 24th, 2021. Just last evening, the Connecticut Senate approved the passage of House Bill 6524 by a 26 to 10 margin. This bill includes several key provisions and amendments important to Connecticut maintaining its fuel cell manufacturing leadership position. The energy transition and the forecasted importance of distributed hydrogen positions Connecticut as a global leader in clean technology essential to achieving global sustainability objectives. The bill requires Connecticut utilities to solicit proposals to acquire new fuel cell electricity generation projects that begin on or after July 1st, 2021. Projects submitted under this mandate will be approved by January 1, 2022. Importantly, House Bill 6524 provides preferences for projects that are cited on brownfields as Connecticut demonstrates its commitment to energy equity and for fuel cells that are manufactured in Connecticut. At our 1.4-megawatt biogas project at the San Bernardino California wastewater treatment facility, construction is completed. We have received the necessary authorizations from the local utility on the interconnection process for this platform, and we have entered the commissioning stage of this project. We expect COD in our fiscal third quarter, and once we achieve COD, FuelCell Energy will help yet another wastewater treatment plant turn off its flare, another example of FuelCell Energy helping a customer to move its decarbonization goals forward and eliminate methane flaring. Equipment manufacturing, fabrication, and early-stage construction are underway on the 2.3-megawatt TriGen hydrogen platform at the port of Long Beach that will deliver carbon-neutral electricity, green hydrogen, and produce water, helping Toyota avoid consuming water as a natural resource at the port. The picture on the right side of the slide is a rendering of the first-of-its-kind project. I want to unpack the value of generated water our TriGen hydrogen platform will provide Toyota. Based on the National Drought Mitigation Center at the University of Nebraska-Lincoln, today 100% of the State of California is in at least moderate drought conditions and the area surrounding Long Beach, California, is classified between severe and extreme, making the TriGen water production even more valuable to Toyota's water use at the port. This project is expected to further demonstrate the ability of FuelCell Energy's platforms to assist our customers in achieving a broad range of sustainable goals. In addition, we are advancing work on our utility-scale deployments in Yaphank, Long Island, New York, and Derby, Connecticut. Together, these three projects total 24.5 megawatts. After resuming production last year at our Torrington Connecticut manufacturing facility with necessary COVID-related safety enhancements, we have increased our annualized production rate from 17 megawatts at the end of fiscal 2020 to more than 30 megawatts as of April 30th, with the objective of reaching an annualized production rate of 45 megawatts by the end of this fiscal year. This increased production rate has been facilitated in part by our efforts in increasing hiring, reducing production pack time, and continued implementation of lean manufacturing principles. Operational excellence has always been extremely important to FuelCell Energy and validation of our efforts. I am proud that we recently added ISO 45001 2018 to our list of certifications. This recognition represents the world's international standard for occupational health and safety and is important to our company as it formally incorporates safety into our everyday practices. My second key message is to highlight our investment in research and development toward the commercialization of our solid oxide power generation storage and hydrogen electrolysis platform, as well as growing our commercial capabilities. Our DOE supportive programs continue to advance the design of our solid oxide stacks, stack modules, and balance plant systems. The prototype electrolysis system that we are currently operating is exhibiting our target electrical efficiencies of about 90% with the capability to increase electrical efficiency to 100%, with an external source of waste. We are also executing programs to develop reversible solid oxide systems for energy storage and very high-efficiency solid oxide power generation systems. The third key message today is our focus on strengthening our leadership in sustainability. The transition to clean energy continues to gain momentum as society looks for decarbonization solutions to address climate challenges while grid reliability deteriorates amidst challenges posed by climate change, underinvestment in infrastructure, and cyberattacks. To meet this growing need, FuelCell Energy remains focused on developing and deploying our distributed decarbonized product portfolio solutions for some of the largest global energy opportunities. Now I will turn the call over to Mike to discuss our financial results in more detail.

Thank you, Jason. Let's begin by reviewing financial highlights for the quarter shown on slide seven. In the second quarter of fiscal year 2021, we delivered revenues of $14 million compared to $18.9 million in the second quarter of fiscal year 2020. Looking at revenue drivers by category, service agreements and license revenues decreased to $700,000 from $7 million reported in the comparable quarter of 2020. The decline in revenue is primarily due to the fact there were no new module exchanges during the quarter, while new module exchanges generated approximately $5.5 million of revenue in the prior year quarter. The second quarter of fiscal year 2021 also included cost estimate adjustments related to changes in the expected timing of future module exchanges, which reduced revenue recognition in the quarter by approximately $800,000. Generation revenues increased to $6.2 million from $4.6 million, primarily due to higher operating output of the generation fleet, which resulted in an increase in generation revenues of approximately $800,000 in sales of renewable energy credits, which also resulted in an increase in generation revenues of approximately $100,000. Advanced technology contract revenues decreased to $7.1 million from $7.3 million compared to the second fiscal quarter of 2020. Advanced technology contract revenues recognized under the joint development agreement with ExxonMobil Research and Engineering Company were approximately $400,000 higher during the second fiscal quarter of 2021, reflecting the continued performance under the JDA with Exxon on fuel cell carbon capture solutions during the quarter. The increase in revenues under the JDA were offset by $600,000 less revenue recognized under government contracts during the second fiscal quarter of 2021 compared to the prior year quarter. The loss from operations totaled $17.4 million compared to $8.1 million in the comparable prior year period, as a result of higher gross loss and higher operating expenses. Gross loss for the second quarter of fiscal year 2021 totaled $4.8 million compared to a gross profit of $200,000 in the comparable prior year quarter. Impacting gross loss for the quarter were lower service gross margin due to the fact there were no new module exchanges during the quarter and due to adjustments of loss accrual reserves to account for changes in the expected timing of future module exchanges. We also saw lower generation gross margin, primarily related to higher costs for plant maintenance, as we continue to invest in efforts to improve fleet performance and lower advanced technology gross margin given the mix of activities in the quarter. These impacts were partially offset by lower manufacturing variances as a result of the increase in the annualized factory production rate. Operating expenses for the second fiscal quarter of 2021 increased to $12.6 million from $8.3 million in the second fiscal quarter of 2020. Administrative and selling expenses in Q2 2021 included additional share-based compensation of $800,000 due to the non-cash grants made in August and November 2020 under our long-term incentive plans. An increase in compensation expense and proxy mailing expenses associated with the company's annual stockholder meeting also contributed to higher administrative and selling expenses in the second fiscal quarter of 2021. Research and development expenses of $3 million during the second fiscal quarter of 2021 reflect increased spending on the company's hydrogen commercialization initiatives. Net loss was $18.9 million in the second fiscal quarter of 2021 compared to a net loss of $14.8 million in the second fiscal quarter of 2020. The net loss per share attributable to common stockholders for the second quarter of fiscal 2021 was $0.06 compared to $0.07 in the second fiscal quarter of 2020. The lower net loss per common share despite a higher net loss attributable to common stockholders is due to the higher weighted average shares outstanding due to share issuances since April 30th, 2020. Adjusted EBITDA totaled negative $11.3 million in the second fiscal quarter of 2021 compared to adjusted EBITDA of negative $3.3 million in the second fiscal quarter of 2020. Please see the discussion of non-GAAP financial measures, including adjusted EBITDA in the appendix of the company's earnings release. Next, please turn to slide eight for additional detail on financial performance and our backlog. The charts on the left-hand side of the slide graphically show the numbers that we just reviewed for the second quarters of fiscal years 2020 and 2021. Looking at the right side of the slide, we finished the quarter with a backlog of approximately $1.3 billion, a decrease of 1.5%. The backlog decrease was partially offset by the inclusion of $59.4 million of generation backlog added during the quarter for the power purchase agreement for the 2.8 megawatt project in Derby, Connecticut. This 20-year power purchase agreement was awarded as part of the competitively bid state-sponsored shared clean energy facility program. Now turning to slide nine. As of April 30th, 2021, cash, restricted cash, and cash equivalents totaled $171.2 million, of which $32.1 million was restricted cash and cash equivalents. On the right-hand side of the slide, we have included a chart illustrating our total project assets, which make up our company-owned generation portfolio, which we continue to invest in. Investments to date include capital spent towards completed projects, as well as projects in development and construction. At the end of the second quarter of fiscal year 2021, our gross project assets totaled approximately $223.4 million. Our generation portfolio totaled 76.1 megawatts of assets as of October 31st, 2021. This includes 32.6 megawatts of operating assets and 43.5 megawatts of projects in process. As projects in process come online, they are expected to contribute higher revenue and adjusted EBITDA. As noted in our release today, we are now targeting commercial operations of our San Bernardino platform in the third quarter of fiscal 2021 and commercial operations of the Groton Navy subbase project is targeted for late summer of 2021. As projects come online, we expect to seek long-term project financing and recycle cash back to the company to redeploy into other projects or growth development activities. I will now turn the call back over to Jason.

Thanks Mike. Next on slide 10 is a summary of the four major technologies that FuelCell Energy is pursuing, each with its own significant total addressable market opportunity that creates optionality for the company and is supported by our broad fuel cell platform portfolio. In distributed generation, we currently have 32.6 megawatts installed and operating, with another 43.5 megawatts in our product backlog. Our distributed hydrogen and carbon separation solutions are commercially available. As previously stated, our carbonate distributed hydrogen solution will be implemented at the port of Long Beach, California. Our platform can produce both hydrogen and water. This capability has potential significance in areas with constrained water supply, as I highlighted earlier. Hydrogen and long-duration energy storage using our solid oxide technology is in advanced development, and our unique carbon capture technology is currently being developed under a joint development agreement with ExxonMobil Research and Engineering Company. We continue to advance our carbonate fuel cell platform’s efficiency, capturing carbon from an external source while also producing power. We believe our carbonate fuel cell platform is the only system in the world that can capture carbon from an external source and produce more power at the same time. We can also directly capture our own carbon emissions from our platform for carbon utilization and/or sequestration. Next, slide 11 illustrates our position across the hydrogen value chain. On the left, you will see a visual illustration of how FuelCell Energy has the potential to deliver hydrogen using three of our platforms, depending on our customer application. Carbonate TriGen delivers power, water, and hydrogen, and depending upon the configuration, can deliver gray hydrogen, blue hydrogen when combined with our proprietary carbon capture technology, or green hydrogen when deployed utilizing biogas with or without carbon capture. FuelCell Energy has spent two decades developing and refining technology to clean impurities from our onsite biogas so that we can generate renewable energy and green hydrogen directly at the biogas source without expensive purification to pipeline quality. The platform we are currently building for Toyota at the port of Long Beach is an example of TriGen delivering green hydrogen. Carbonate REP, which stands for reformer-electrolyzer-purification, can be utilized when coproduction of power is not required and it can deliver green hydrogen, blue, or gray hydrogen. In essence, this is running our carbonate fuel cell and electrolysis in reverse mode to singularly produce hydrogen. Thirdly, we are advancing our solid oxide technology, which produces hydrogen through highly efficient high-temperature electrolysis. It can also operate in reverse mode, using stored hydrogen to produce zero carbon power. Slide 12 provides a more detailed overview of our solid oxide platform. A prototype unit is currently running in our Danbury, Connecticut headquarters for testing various platform design elements. It will be modified to run in reversible mode, alternating between hydrogen generation and power production, demonstrating our hydrogen-based energy storage platform. We have been selected for a cooperative agreement from the U.S. Department of Energy to fund the design, manufacture, and testing of a large system at FuelCell Energy's Danbury facility to be delivered to Idaho National Laboratories. There, it will undergo rigorous testing to confirm electrical efficiency, as well as the ability to utilize nuclear power plant waste heat to obtain even higher efficiencies of up to 100%. This project represents a key step in FuelCell Energy's path to commercialize our high temperature, high efficiency solid oxide electrolysis technology. The multi-stack module that forms the core of the system is a modular building block, easily scalable for larger systems up to gigawatt scale. Just last week, Senator Chris Murphy and Congresswoman Jahana Hayes visited us here in Danbury to witness firsthand electricity being converted to hydrogen by our prototype solid oxide unit. Both the Senator and Congresswoman are excited about the development of our differentiated technology taking place in Connecticut and the role our state can play in the energy transition, creating clean tech jobs in their congressional districts. We are thankful for their time, appreciative of their support for federal programs that encourage the continued and expanded deployment of fuel cells, and encouraged by their leadership in important matters like decarbonization, grid reliability, the clean energy transition along with the recognition that fuel cells are needed to realize global climate ambitions. Next on slide 13 is our powerhouse business strategy, which is based on three core pillars of transform, strengthen, and grow. We introduced the powerhouse business strategy in January of 2020 to serve as a guidepost for our turnaround, as we repositioned FuelCell Energy to capitalize on the energy transition. The first phase of our plan was to transform the company by building a durable financial foundation and enhancing financial results. We have taken a number of important steps to strengthen the balance sheet, allowing us to finance new projects, push forward with the commercialization of breakthrough products, and lower our cost of capital. Currently, we're focused on the strengthening phase of our strategy to drive operational excellence throughout the business and make capital investment decisions that further enhance our performance while adding top-quality talent to our team. To fully deliver on the powerhouse business strategy, our third pillar for long-term growth is to penetrate markets and customer segments where our technology platforms can be the preferred solution. We are increasing our annualized production rate as previously mentioned and would generate operating leverage as we increase our production rate for future business growth. Turning to slide 14. We will continue to work toward our three-year long-term targets and goals that we established with the launch of our powerhouse business strategy looking ahead to fiscal year 2022. Reaching these targets will require successfully executing against our 43.5 megawatt project backlog and achieving commercial operation for each of those projects. As I have explained in today's presentation, we are pursuing commercialization of our advanced technology around our E&P and solid oxide hydrogen, and focusing on advancing the development of our carbonate carbon capture platforms for capturing carbon from external sources each of which offers potential growth opportunities for our company. To conclude my remarks, I will review the key investment highlights for FuelCell Energy on slide 15. We have executed several strategic actions to strengthen our balance sheet by repaying debt, enhancing liquidity, and reducing our cost of borrowing. We believe these steps have positioned the company to execute on our three-year growth strategy. We have an exceptional leadership team and continue to add talent across the company. We are focused on taking care of our customers, hitting our financial milestones, and continually building upon our operational excellence while adhering to our core purpose. Our portfolio of innovative technologies has a potentially key role to play in the global goals of decarbonizing the grid, developing the hydrogen economy, and supporting existing energy and industrial infrastructure investments with differentiated carbon capture solutions. We are working to implement our powerhouse strategy to strengthen our business, maximize operational efficiencies, and position us for long-term growth. Finally, we intend to be a leader in sustainability and environmental stewardship by delivering on sustainability through our technology and the full circular life of our platforms. I will now turn it over to Jason Stevenson to begin Q&A.

Your first question comes from Colin Rusch from Oppenheimer. You may proceed.

Thanks so much. Guys, can we get an update on the pipeline of projects that you're looking at, and how they're progressing outside of Connecticut versus you made some progress. But we'd love to see how you're competing in some of the other geographies.

Yeah. How are you this morning? Thanks. Thanks for joining the call. Just to give you a sense of that. As we work to do the work that we were doing around, the transformation part of our pillar or the big, but another big part of that has been trying to build our pipeline and opportunities not only outside of the state of Connecticut, but around other parts of the world. So, if I give you the sense of the pipeline, as we see opportunities today across the U.S., they represent approximately 40% of the opportunities that we see, Europe is about 34%, and Asia is currently around 13%, and across Latin America and other markets, we're roughly about 12%. So, we're starting to see good momentum in the markets we are focusing on and leveraging the product as a platform. For example, the Toyota project is a scenario where we're offering more benefits than just traditional power or combined heat and power with that type of solution. As we approach customers around the world, that’s a big focus of ours: to leverage the multi-site capabilities of our platform to attract more customer demand for our products.

That's super helpful. I've got two more quick ones. First, on the manufacturing side, you obviously had to scale up. Raw materials have become a bigger consideration from a purchasing perspective. We've seen a ton of inflation around some basic materials. I just want to get a sense of how you guys are positioned regarding exposure to raw materials and any sort of hedging that you may have in place at this point?

Colin, thank you very much for your question. Great question. We have a very well-established and solid global supply chain. These relationships have been in place for extended periods. We have pursued fixed forward pricing agreements to ensure continuity of supply while protecting against unfavorable market dynamics. So, we feel confident about our positions with our supply lines as we look ahead to executing our projects.

Okay. Perfect. And then one last one, obviously interest rates are tremendously low here. You guys have really supplemented the balance sheet in a comprehensive way. Can you talk a little bit about the potential of refinancing existing portfolios, what sort of savings we might see on that and a general sense of timing that you are looking at for those sorts of opportunities?

Good morning. Thank you for joining the call. As mentioned in my remarks, we expect to bring in permanent financing for the projects as we bring them to commercial operations, both in terms of tax equity and back leverage. As we've done for the projects that are currently operating in our portfolio, we have over 40 megawatts of projects coming online. So, that's an opportunity to recycle capital back into the company as those projects come online. As I mentioned, the San Bernardino project is expected to commence commercial operations in fiscal Q3, and then the Groton subbase project is expected to go live in late summer of 2021.

Your next question comes from the line of Praneeth Satish from Wells Fargo. Your line is open.

Thanks. Good morning. Just wondering if you could comment on the support you're seeing generally from the Biden administration for hydrogen adoption. I think there was a proposal by the DOE earlier this week to try to get the cost of green hydrogen down to a dollar per kilogram in a decade. So, just curious for your thoughts on this? And maybe the likelihood at some point of greater subsidies from the federal government.

Good morning, Praneeth, and thank you for your question. We are optimistic about what the Biden administration is trying to accomplish overall with respect to the energy transition and the focus on strengthening the reliability of the energy grid itself. We believe our technologies will have an opportunity to participate with opportunities around microgrids as well as across the three platforms we discussed regarding hydrogen. The U.S. is trying to figure out how to advance the hydrogen economy and is playing catch-up with markets like Europe and Asia regarding plans announced across those regions. We think the Biden administration, through our interactions with the DOE, is showing tremendous support for hydrogen; we look forward to that development. As we indicated, we have DOE-supported projects that we are working on that highlight how we can effectively utilize the capabilities of our platform.

Great. Thanks. And just one more question. I'm wondering if you could give us an update on your carbon capture progress so far, and maybe the roadmap there to commercialization.

Sure. We are making a lot of progress with our joint development agreement with Exxon. Our carbon platform has been optimized for power generation. The Exxon program is developing modifications designed to optimize it for carbon capture. We've been able to significantly increase the capabilities and power while capturing carbon. We continue to advance work for the project demonstration at one of Exxon's facilities in the Netherlands in Rotterdam. The planning for that demonstration is underway, and we're pleased with our progress.

Just to add onto that, as you think about our platform and carbon capture, we view it as both: How do we leverage our platform for carbon capture related to sequestration and apply that technology toward large scale applications whether that's gas power generation or industrial applications. We also think about carbon from a utilization standpoint, with innovation surrounding how carbon is utilized in different ways, such as producing concrete or plastics. Our platform has the ability to capture carbon and purify it to food-grade CO2, which we can deliver to food and beverage companies while continuously providing reliable electricity. The thermal use in production facilities creates additional value while ensuring energy security in pricing on carbon.

Your next question comes from the line of Jed Dorsheimer from Canaccord Genuity. Your line is open.

Hey, sorry. I had it on mute. Thanks for taking the question guys. I guess, just on the generation side, what changed in pricing quarter to quarter? It ticked up, but on the same base, how should we think through those short-term dynamics?

If I didn't tell you that you're on mute or something. Great question. Let me have Mike Lisowski address this a bit. In general, right, the way you should think about it is just increased output with the things that we've been doing to enhance the operations of our current generation portfolio.

Jed, thanks for the question. The improvement there is based on the overall output generation of the fleet. This is built and centered around the improvements we've made with respect to the replacement of modules at end of life, among other performance enhancements.

Got it. Thanks. And then, I guess, just the percentage of the base that gray versus blue. I know the TriGen and sort of the capture is a relatively small portion. But I'm just curious, what is that percentage?

So, if you think about our existing operating portfolio today, none of those platforms currently deployed, grid-connected, or behind the meter at the customer are doing electrolysis or hydrogen production. The way you should consider our carbonate platform is that we can deliver both gray and blue hydrogen depending on its configuration. Our carbonate platform has a few options for delivering hydrogen. The Toyota project is an example of using direct biogas to produce green hydrogen, carbon-neutral power, and water from that TriGen platform. We're also working on commercializing electrolysis using our carbonate platform, producing hydrogen depending on the configuration from various input sources, giving varied hydrogen outputs. So, it really depends on the configuration, but across both the carbon and solid oxide platforms, we can deliver hydrogen.

Thank you, that's helpful. It raises the question of why concentrate on the U.S. instead of focusing on places like Qatar, which relies heavily on LNG shipping and might provide better marketing opportunities. Is it due to a lack of infrastructure or demand for hydrogen, or is there another reason for not pursuing these smaller projects?

We are not just focused on the U.S. As I mentioned, part of our powerhouse business strategy has been to expand our activity into growth phases. Part of that includes adding resources for market coverage, allowing us to pursue broader opportunities globally. As we indicated, we are making progress in terms of our hiring and deploying resources as well as developing relationships in various markets.

Sure. Well, listen, I appreciate it. I'll jump back in the queue.

Your next question comes from the line of Noel Parks from Touhy Brothers. Your line is open.

Hey, good morning.

Good morning. Just to give you some context on the 2.8 megawatt award in Derby, this project was part of a competitive bidding process from the State of Connecticut for shared clean energy facilities. We participated in this open competitive bid process and won against other generation resources like wind and solar. The project award process lasted several months, and following receipt of the award, we move ahead with development and construction of the project.

Great. And for San Bernardino and Groton Navy are both coming online, later in the summer. Just for some perspective, could you talk about the usefulness of having new fully life projects, as sort of just in demonstration for trying to get new contracts. If you were replicating a project like San Bernardino today, just curious where do you think the costs would be this time around, whether due to efficiencies or lessons learned versus the labor and materials service environment?

I think if I'm understanding your question correctly, there are always opportunities we identify through new projects. Learning from previous projects, we can apply the insights to improve onsite construction practices and sourcing contractors, driving scale in manufacturing capabilities. This should contribute to lowering actual costs on the next project. Continuous improvement and lean manufacturing practices are key across all projects we execute. Every time we deploy technology, it's our same proprietary gas cleanup gated and carbonate fuel cell platform we are using, which enhances efficiency and creates the opportunity to lower costs.

Great. Thanks a lot.

Thank you.

Your next question is from Jeff Osborne from Cowen and Company. Your line is open.

Hey, Everyone. I have a question about the Connecticut 6524 program. Is Beacon Falls eligible for that?

Yes. A project like that would fall into that legislation, pending the Governor's signature.

Your next question comes from the line of Chris Souther from B Riley. Your line is open.

Hey, guys. Just a quick one then on module exchange timing for the rest of the year. Are there any other key module exchanges that you're expecting throughout the year, or how should we think about the timing of some of that?

Great question, Chris. Module replacements are a standard part of our business, and we perform them as needed. Our overall module replacement plan remains unchanged. We're currently focused on specific projects in our generation portfolio and under service agreements. Our manufacturing plan is aligned to support module replacements adequately.

I wanted to get a sense of the pipeline. Can you break it down between those interested in what you're doing with Toyota and exploring additional value streams versus distributed generation and longer-term opportunities? Could you provide some details on the pipeline?

Just to provide a broad sense, we see ample opportunities leveraging biogas, especially for our platform. We also see opportunities with edge data centers that need reliable power integration and cooling. We are seeing prospects in education, healthcare, the food and beverage sector, and government/military engagements. Additionally, we are targeting microgrid implementations for commercial, industrial, and utility customers to enhance grid resilience and reliability. We see growing demand across various sectors, looking for authentic ways to contribute to decarbonization while at the same time needing reliable energy.

Okay. No, that's very helpful. Thanks guys.

Thank you.

Your final question comes from the line of Eric Stine from Craig-Hallum. Your line is open.

Good morning, everyone.

Good morning, Eric.

Hey, just wanted to touch on the product side of the business. I know that's clearly a focus. You talked about re-engaging there, so maybe what have been some of the gating factors? What are some of the steps you're taking and maybe a timeframe to when you think you will start to see some traction?

As we work through our business strategy, one of our focuses in the first several months has been fixing our balance sheet and creating some liquidity for the company. The sales cycle for our utility-scale projects typically ranges from 12 to 18 months. We're optimistic that we will start converting projects in our pipeline to product sales. Many of these opportunities globally will be product sales as we bundle services that run coterminously with the asset's life, often extending to 20 years with service agreements.

There are no further questions. I'd now turn the call back over to Jason for closing remarks.

Thank you all for joining us today. We will continue to execute on our powerhouse business strategy, working to deliver profitable growth and optimize returns. The FuelCell Energy team is excited about our work to deliver on our purpose to enable the world to live a life powered by clean energy. We are committed to delivering long-term shareholder value. Thank you for joining our call today. I hope everyone has a great day.

That concludes today's conference call. Thank you everybody for joining. You may now disconnect.