Fuelcell Energy Inc Q1 FY2022 Earnings Call

Good morning. My name is Chantelle, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the FuelCell Energy 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there’ll be a question-and-answer session. Thank you. Tom Gelston, you may begin your conference.

Thank you, operator. 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 first quarter of fiscal year 2022, and our earnings press release and our quarterly report on Form 10-Q are available in the Investor section of our website at www.fuelcellenergy.com. Consistent with our practice, in addition to this call and our earnings press release, we have posted a slide presentation on our website. This webcast is being recorded and will be available for replay on our website approximately 2 hours after we conclude the call. Before we begin, please note that some of the information that you will hear or will be provided with today will consist of forward-looking statements with the meaning of the Securities Exchange Act of 1934. Such statements express our expectations, beliefs, and intentions regarding the future and include, without limitation, statements regarding our anticipated financial results, our plans and expectations regarding the continuing development, commercialization, and financing of our fuel cell technology and our business plans and strategies. Our actual future results could differ materially from those described in or implied by such forward-looking statements because of a number of risks and uncertainties. More information regarding such risks and uncertainties is available in the Safe Harbor statement, in the slide presentation and in our filings with the Securities and Exchange Commission, particularly the risk factor section of our most recently filed annual report on Form 10-K and any subsequently filed quarterly reports on Form 10-Q. During the course of this call, we will be discussing certain non-GAAP financial measures, and we refer you to our website and to our earnings press release and the appendix of the slide presentation for a reconciliation of those measures to GAAP financial measures. Our earnings press release and a copy of today’s webcast presentation are available on our website at www.fuelcellenergy.com under Investors. For our call today, I’m joined by Jason Few, FuelCell Energy’s President and Chief Executive Officer; and Mike Bishop, our 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 our leadership team. I will now hand the call over to Jason for opening remarks. Jason?

Thank you, Tom, and good morning, everyone. Thanks for joining us on our call today. I want to start by offering prayers and support to the people of Ukraine who are suffering. While we do not have operations in Ukraine, we are hoping for the restoration of peace in the face of the humanitarian crisis. We also launched a matching gift program in support of the overwhelming interest of the FuelCell Energy team members to support the citizens of Ukraine. In our first quarter, we made continued progress in executing our Powerhouse Business Strategy, including the publication of our first sustainability report, making clear our short-term net zero targets for Scope 1 and 2 emissions to be achieved by 2030 and our longer-term 2050 Scope 3 commitment, reimagining our global brand to better reinforce our agenda to decarbonize power and produce hydrogen; expanding our carbon capture product development in Canada, working with Canada’s Clean Resource Innovation Network, which included Chevron Canada, Shell Canada, Suncor Energy, and Canadian Natural Resources Limited, growing revenue by over 100% year-over-year and working to define our company as a global leader in decarbonizing power and producing hydrogen. Mike and I look forward to providing some insight around these activities and the other first quarter results in the coming slides. But as I always do on these calls, I’d first like to provide a brief overview of the company. As shown on Slide 3, FuelCell Energy achieved annual revenues for fiscal year 2021 of almost $70 million, which came from three revenue categories: service and license, advanced technologies, and generation, all of which represent diversified sources of recurring revenue under multi-year contracts. Over the past two fiscal years, we’ve had no revenue from product sales. However, in the first quarter, product sales returned to our revenue mix as we delivered six replacement modules to service POSCO Energy’s existing installations in South Korea under our recent settlement agreement with POSCO Energy. With the market once again open to us as a result of the agreement, we are optimistic that we will see revenue from new product sales in South Korea in addition to sales and replacement modules going forward. We’re also looking forward to building our sales pipeline in other Asian markets as well as select countries in Europe, the Middle East, Africa, and North America, where we have made it a priority to target product sales. Turning to Slide 4. As a company, we are committed to our purpose of enabling a world empowered by clean energy. We believe that our technology is well positioned, as every industry and every company will be impacted by the transition to net zero. In parallel, organizations must solve for energy security and energy independence, which represent important macro themes for our company. The world will always need reliable 24/7 power created in an environmentally responsible manner. Therefore, when it comes to what we do, we believe FuelCell Energy is uniquely positioned to assist customers on a safe, secure, and practical path to carbon zero. And how we do this is by decarbonizing power and producing hydrogen. We believe we have the only technology that can capture CO2 while producing power and hydrogen; produce hydrogen, power, and water simultaneously; and produce hydrogen in multiple ways, for example, using electricity and water or biogas. FuelCell Energy’s technology provides localized solutions for clean energy that deliver real-time benefits to the communities in which our platforms operate and reduce Scope 1 and 2 emissions. We do this in a manner which supports high standards of living and economic growth while protecting the environment, minimizing land use compared to wind and solar projects, avoiding costly transmission build-outs, and adapting to new resource challenges. This purpose drives our strategic focus and the work we are passionate about doing. Next, I would like to turn the discussion to business results and corporate development during the quarter summarized on Slide 5. Our quarter was defined by execution against our backlog, including achieving commercial operations of the LIPA Yaphank project, recognition of product revenue through the sale of six modules to a subsidiary of POSCO Energy in South Korea, successfully demonstrating the advancement of our carbon capture capabilities by achieving a technical milestone under our joint development agreement with ExxonMobil Research and Engineering Company, and receiving a carbon capture project award from Canada’s Clean Resource Innovation Network. Overall, I’m very pleased with the progress our team has made in advancing our long-term goals, including executing on our existing backlog. Commercial operation commenced in early January on the 7.4 megawatt utility scale LIPA Yaphank project. The project has been added to our generation portfolio bringing the total megawatts driving recurring generation revenue to 41.4 megawatts. This is an important step for it to continue to enhance the recurring revenue profile of FuelCell Energy. With respect to the 7.4 megawatt project at the U.S. Navy Submarine Base in Groton, Connecticut, we’re in the process of repairing and upgrading a mechanical component that was not performing according to engineering specifications. Upon completion of the repair, upgrade work, and reinstallation of the mechanical components at the project site, we will restart the process of commissioning the project. Let me be clear, this did not meet our expectations for delivery, and I appreciate the efforts and focus of the FuelCell Energy team as they work to put us on a path to achieving commercial operations. Once fully operational, incorporation of this platform into a microgrid is expected to demonstrate the ability of FuelCell Energy’s platform to increase grid stability and resilience while supporting the U.S. Military’s efforts to fortify base energy security and demonstrate the Navy’s commitment to clean reliable power with microgrid capabilities. The Toyota project at the Port of Long Beach, a 2.3 megawatt trigeneration platform, will produce electricity, hydrogen, and water, offering a unique set of capabilities from a single platform. FuelCell’s platform equipment has been built and delivered to the site, and civil construction work is underway. When it achieves commercial operation, this power plant will deliver carbon-neutral electricity, green hydrogen, and water, enabling Toyota to avoid water consumption in a region experiencing extreme drought conditions, enhances its operations through a more reliable power and advanced passenger vehicle and Class 8 heavy-duty truck hydrogen transportation. Hydrogen has the opportunity to fully repower the transportation sector. Second, having executed a favorable settlement agreement with POSCO Energy and its subsidiary Korean Fuel Cell, we sold and delivered via Ex Works the first six of the initial 12 modules ordered under the settlement agreement to Korea Fuel Cell, resulting in $18 million in realized product revenue in the first fiscal quarter of 2022. We have planned production of the additional eight modules required to be purchased by Korea Fuel Cell under the settlement agreement across the balance of the calendar year. This settlement agreement not only provides FuelCell Energy with the opportunity to sell modules to Korea Fuel Cell for POSCO Energy’s existing customers but importantly confirms our access to the South Korea and broader Asian markets. My third key message is that we have successfully achieved a significant technical milestone in the development of our carbon capture application under our joint development agreement with ExxonMobil Research and Engineering Company. FuelCell Energy’s unique value proposition for carbon capture is that we believe we are the only carbon capture technology that can capture carbon while producing power and hydrogen at the same time. Other carbon capture technologies represent a parasitic load on the power source. In other words, they require a significant amount of power to operate. One of the key focus areas of the JDA with Exxon has been to increase the power that sales can produce while concentrating and capturing carbon dioxide. This is important because the more power we can produce while capturing carbon, the more revenue can be generated through either the sale of electricity or avoiding the cost of purchasing electricity from other sources, thus lowering the cost of capture. We believe that achievement of the milestone is an indication that the JDA has yielded cell improvements that may enhance the economics of carbon capture with our carbonate platform. Fourth, we are a clean technology energy company, but we are also a responsible corporate citizen; wholly committed to protecting the environment; attaining net zero goals; being a diverse, equitable, and inclusive company; and exercising governance. We have shared our commitment to environmental, social, and governance issues through the issuance of our first sustainability report in early February. Although much of the work isn’t new, we are proud to establish a solid ESG reporting baseline and will work to improve both our performance and disclosure in the coming years. Lastly, I’m keeping the strategic comments on this call fairly short. As we look forward to hosting our 2022 Investor Day next week on Wednesday, March 16, at 10 AM Eastern, we are excited about our prospects and future and anticipate sharing more about our vision, capabilities, and team with everyone on the webcast. And now, I will turn the call over to Mike to discuss this quarter’s financial results in more detail.

Thank you, Jason, and thanks to those that joined our call today. You have heard from Jason about a number of significant developments that took place during our first quarter. Now, I would like to spend a few minutes providing some details regarding our financial results for the first fiscal quarter of 2022. Please turn to financial highlights shown on Slide 7. In the first quarter of fiscal year 2022, we reported revenues of $31.8 million, compared to $14.9 million in the first quarter of fiscal year 2021, an increase of approximately 114%. Looking at revenue drivers by category, product revenues returned this quarter, totaling $18 million, reflecting the Ex Works delivery of six fuel cell modules to a subsidiary of POSCO Energy under the recent settlement agreement. Service agreement revenues decreased 56% to $2.2 million from $4.9 million. Revenue recognized in the first quarter of fiscal 2021 related to module exchanges at several plants and routine maintenance activities. The decrease in revenues for the first quarter of fiscal 2022 is primarily due to the fact that there were no new module exchanges during the quarter compared to the prior year period. Revenue from service agreements varies on a quarterly basis depending on the number of module exchanges in the period. Generation revenues increased 53% to $7.5 million from $4.9 million in part due to the inclusion of the 7.4 megawatt LIPA Yaphank project in January 2022 and the 1.4 megawatt San Bernardino Renewable Biofuels project in July of 2021. In addition, generation revenues increased due to the higher operating output of the generation fleet portfolio as a result of investments in maintenance activities made in the prior year. Advanced Technologies contract revenues decreased 19% to $4.1 million from $5.1 million. Compared to the first fiscal quarter of 2021, Advanced Technology contract revenues recognized under the joint development agreement, or JDA, with ExxonMobil Research and Engineering Company, or EMRE, were approximately $1.4 million lower, offset by an increase in revenue recognized under government contracts of $0.3 million. As Jason mentioned, during the three months ended January 31, 2022, the company achieved the first technical milestone under the JDA. As a result, the company will receive a payment of $5 million. The company has not recognized revenue in connection with this milestone achievement due to our prior agreement regarding a future potential demonstration project with EMRE, ExxonMobil’s Rotterdam refinery in the Netherlands. Under this agreement, we agreed to either make an investment of $5 million in the Rotterdam project or discount EMRE’s purchase of our fuel cell module and detailed engineering design for the Rotterdam project by the same amount. The company will continue to evaluate revenue recognition of this milestone achievement as project negotiations with ExxonMobil or a subsidiary thereof evolve. Gross loss for the first fiscal quarter of 2022 totaled $2.9 million compared to a gross loss of $3.6 million in the comparable prior year quarter. The decrease in gross loss is partly a result of revenue recognized from sales of modules during the quarter to a subsidiary of POSCO Energy. In the quarter, the company realized lower service margin due to no new module replacements occurring in the quarter, $3 million of non-recoverable costs related to the construction of the Toyota project and a $1 million asset impairment charge related to a legacy conditioning facility at our Danbury, Connecticut headquarters. Operating expenses for the first fiscal quarter of 2022 increased to $41.9 million from $10.8 million in the first quarter of 2021. Administrative and selling expenses included $24 million of non-recurring legal fees associated with the settlement of the POSCO Energy proceedings. Excluding these fees, the increase in administrative and selling expenses related to higher sales, marketing, and consulting costs as the company is investing in rebranding and accelerating its sales and commercialization efforts, and an increase in compensation expense resulting from an increase in headcount. Research and development expenses of $5 million during the quarter reflect increased spending on the company’s hydrogen commercialization initiatives compared to the prior year period. The loss from operations totaled $44.8 million in the first quarter of 2022 compared to $14.4 million in the comparable prior period. Net loss was $46.1 million in the first quarter of 2022 compared to $46 million in the prior year period. Both periods were impacted by non-recurring expenses. The first fiscal quarter of 2022 was impacted by the previously mentioned non-recurring legal expense of $24 million associated with the settlement of the POSCO Energy proceedings. The first quarter of 2021 was impacted by charges associated with a change in the fair value of a warrant liability issued to a legacy lender under a now-extinguished credit agreement totaling $16 million. Additionally, the first quarter of 2021 included a loss on extinguishment of debt and a loss on extinguishment of a preferred stock obligation of subsidiary totaling $12.1 million. Interest expense was also lower in the first fiscal quarter of 2022 compared to the first fiscal quarter of 2021. The net loss per share attributable to common stockholders in the first fiscal quarter of 2022 was $0.11, compared to $0.15 in the comparable prior year quarter. The lower net loss per common share reflects a lower net loss attributable to common stockholders despite the $24 million, or approximately $0.07 per share of non-recurring legal expense associated with the settlement of the POSCO Energy proceedings. The lower net loss attributable to common stockholders was partially offset by a net loss allocated to non-controlling interests totaling $5.5 million for the LIPA Yaphank project tax equity financing transaction, or approximately $0.01 per share. There was no comparable net loss for the prior year as the LIPA Yaphank project tax equity transaction closed, and the project began operating in the first quarter of fiscal 2022. The lower net loss per share was also a result of higher weighted average shares outstanding due to share issuances since January 31, 2021. Adjusted EBITDA totaled negative $13.6 million in the first fiscal quarter of 2022 compared to adjusted EBITDA of negative $7.4 million in the first fiscal quarter of 2021. Please see the discussion of non-GAAP financial measures, including adjusted EBITDA in the appendix of the slide presentation or in the appendix at the end of our earnings release. Next, please turn to Slide 8 for additional details on our financial performance and backlog. The chart at the left-hand side of the slide graphically shows the numbers we just reviewed for the first quarters of fiscal years 2021 and 2022. Looking at the right-hand side of the slide, we finished the quarter with a backlog that was approximately 3% higher year-over-year at approximately $1.31 billion, reflecting continued project build execution and adjustments to our generation backlog and the addition of product sales backlog from the module order from a POSCO Energy subsidiary, module exchanges with higher future output and expected revenues, and the inclusion of the 2.8 megawatt project in Derby, Connecticut, which was awarded in fiscal year 2021. Advanced Technologies backlog reflects new contracts from the U.S. Department of Energy, partially offset by work performed under our joint development agreement with EMRE. Turning to Slide 9, I would like to bring some perspective to the company’s enhanced liquidity and continued investments in our project assets. In the first fiscal quarter of 2022, we closed a tax equity financing transaction with a subsidiary of Franklin Park for our LIPA Yaphank project, which delivered $12.4 million in gross proceeds to FuelCell Energy. As of January 31, 2022, we had total cash and cash equivalents of approximately $405.4 million. This includes approximately $377 million of unrestricted cash and cash equivalents represented by the darker blue bar on the chart in the center of the slide, and $28.5 million of restricted cash and cash equivalents represented by the lighter blue bar. On the right-hand side of the slide is a chart illustrating our total project assets, which make up our company-owned generation portfolio. We continue to develop, construct, and grow our portfolio project assets. Investments to date reflect capital spent on completed operating projects, as well as capital spent on projects currently in development and construction. At the end of the first quarter of fiscal year 2022, our gross project assets totaled approximately $256.1 million, which excludes accumulated depreciation. As detailed on Slide 18 in the appendix of this presentation, our generation portfolio totaled 75.3 megawatts of assets as of January 31, 2022. This includes 41.4 megawatts of operating assets and 33.9 megawatts of projects in process. As projects in process begin commercial operation, they are expected to contribute higher revenue. Additionally, as these projects in process reach mechanical completion and/or achieve commercial operation, we expect to see long-term tax equity financing, such as the example I previously discussed, as well as back-leveraged debt transactions to further recycle capital back into the business. We are pleased with the continued progress being made. And from a financial perspective, we believe we are well positioned to invest in capabilities to support the future growth and product commercialization opportunities. I will now turn the call back over to Jason to further discuss these initiatives.

Thanks, Mike. On Slide 11, I want to share some highlights of our recently updated Powerhouse Business Strategy to take us to the next phase of the company’s journey towards long-term growth; grow, we want to pursue growth in markets and customer segments where we see significant opportunities; scale to achieve growth, we plan to scale our existing platforms by investing in extending and deepening our leadership and total human capital across the organization; and innovate, over our 50-year history, we have never stopped innovating. We plan to continue to innovate for the future to enable our participation in the growth of the hydrogen economy and carbon capture and to deliver on our purpose. Our Powerhouse Business Strategy has evolved to focus on growth; the energy transition is happening at an accelerated pace, and we believe our platform technologies will play a significant role in helping global society achieve our collective sustainability goals. Thus, we are moving forward with making investments in capacity, capability, and global talent, which we believe will enhance our ability to capture more of the market opportunity over the coming years and deliver enhanced shareholder returns over the long run. Looking at Slide 12. I’m proud of the progress we’re making as an organization, including the recent launch of our new brand identity. Evolving the FuelCell Energy brand is intended to be a signal to our customers, communities, team members, and you, our stockholders, of our absolute commitment to enabling a safe, secure, and practical approach to realizing the goals set forth in our inaugural sustainability report. Our brand encompasses our purpose, what we do, and how we do it. We are focused on enabling a safe, secure, and practical path to carbon zero, and we help to decarbonize power and design and build fuel cells that produce hydrogen. Three design points define the new identity. First, it represents the journey we are helping our customers take to reach carbon zero. The designs use gradients to signal the journey our customers are undertaking towards carbon zero. Additionally, the reductive footprint of the broader design system reinforces how frictionless adoption of clean energy can be. Second, it takes inspiration from our DNA. Fuel cells don’t combust their fuel but are fuel-flexible in that they can run on biogas, renewable natural gas, hydrogen, and natural gas blends, natural gas, or a mixture of those fuels and hydrogen. In all cases, the fuel cell produces a chemical reaction, which results in electricity. The design of the logo was inspired by the bonds between the molecules that are broken and formed in the chemical reaction in our fuel cells. Its letters incorporate 'FCEL', our stock ticker symbol. If you look closely, the logo also forms a zero, representing our customers’ journey and ours toward net zero. It is also an integral part of our commitment to global net zero goals. On Slide 13, we highlighted the successful launch of operations for our 7.4 megawatt LIPA Yaphank project. This project can power approximately 7,500 homes, situated on a landfill that is being transitioned to a clean energy park. The FuelCell delivers to Long Island the benefits of our distributed power solution, namely clean and resilient baseload power and improved air quality versus conventional power generation sources, and reduces Long Island’s dependency on transmission and the incremental investment required to build new long-distance high-voltage transmission lines. This project has been added to our generation portfolio, and we are working to complete the capital structure that will allow us to return significant capital back to FuelCell Energy while also providing increased recurring revenue and margin going forward. Turning to Slide 14. I encourage you to download and review our sustainability report that I mentioned earlier. This inaugural sustainability report is meant to outline how we fulfill our corporate purpose by actively managing environmental, social, and governance risks. Our active focus on diversity, equity, and inclusion presents opportunities that are material to our business and stakeholders. In fulfilling our corporate purpose, we find ourselves in the enviable position of helping customers achieve their own sustainability goals by reducing their Scope 1 and 2 emissions and enhancing the communities in which they operate through improved air quality, more efficient land use than intermittent resources, and generating local tax revenues. Additionally, we have committed to a net zero target for our Scope 1 and 2 emissions by the year 2030 and to net zero by 2050 for our Scope 3 emissions. Before I open the call to questions, I wanted to remind everyone one last time that on Wednesday, March 16 at 10 AM Eastern Time, we will host a Virtual Investor Day to give a deeper explanation of our strategy and our plans to bring new technologies to market. We are excited to share our thoughts on topics such as the company’s long-term growth opportunities and strategy, business execution, capital allocation priorities, global team, and plans to drive long-term shareholder value. You can register for and view the Investor Day presentation by accessing the link on the Events Calendar on the Investor page of our corporate website. We welcome your participation. With that, I will now turn it over to the operator to begin Q&A.

Our first question comes from Jed Dorsheimer with Canaccord Genuity. Your line is open.

Sorry, I had it on mute. Hey, thanks for taking my question. I was wondering if you could provide more details about the breakthrough with ExxonMobil, it seems like could be game changing between blue versus gray and green hydrogen?

So, Jed, good morning. Thanks for joining the call. This is Jason. With respect to Exxon, the work that we’re doing with them is really focused on carbon capture. Our platform has the ability to capture carbon from an external source and also produce and deliver hydrogen. So the work that we’re doing, and our focus is on ensuring that we maintain optimal performance from a power output standpoint as well as optimal performance regarding our ability to concentrate and capture carbon for whatever the use may be, whether that be sequestration or utilization. As we’ve laid out the work plan with ExxonMobil Research and Engineering, we set a number of milestones that are really – you can think of them as mile markers. These mile markers provide a clear indication that we’re progressing along the things that we think are most technically important to demonstrate that the technology will perform at a level that will do a few things: one, that we will efficiently concentrate, capture and separate carbon; two, that we will maintain power density or power production; and three, that we can do that efficiently across a number of different blue streams, which gives us the ability to ultimately deliver a much lower cost of carbon capture as a result of being able to sell power and/or replace power that’s being used at that particular facility. Achieving the milestone is just another mile marker along the way to demonstrate that our technology indeed has the ability to be effective in carbon capture.

Got it. And then I guess there’s my follow-up and perhaps a bit of an extension here. So far in the U.S., the commercialization has been slower, I guess, would probably be the right adjective. And you’re now looking at a pivot or expansion into the Korean markets. Is there something else that’s going on in terms of that expansion into Korea that seems favorable for your technology?

So Jed, no great question. We believe that both Asia, especially Korea, as well as Europe are ahead of the U.S. today with respect to announcements on projects around hydrogen. However, we do think that the current infrastructure package and the $8-plus billion that have been announced in support of hydrogen hub projects are a good indication of the U.S.'s intent to catch up, if you will. In Korea, we are excited about the opportunity because we have effectively been out of the largest fuel cell market in the world for the last six years. Now with the settlement and our ability to search opportunities, we think we are well positioned because those projects in Korea tend to be large-scale utility projects that also have a need for the high-grade heat our platform provides, which differentiates us from other fuel cell players. Our one of our projects in Korea is a 20 megawatt project that is grid-connected and connected to the district heating system where we provide high-grade heat for that. On a core business platform, we’re excited about the opportunity overall. We think we’re positioned to go after market opportunities in more utility-scale projects in Korea. With respect to hydrogen, the government has announced a very robust set of objectives around hydrogen, and we think that gives us an opportunity not only on our trigen platform but also the work that we’re doing to commercialize our solid oxide technology. Hydrogen is going to be an important part of the energy economy going forward in Korea, which makes it promising for us.

That’s helpful. I’ll jump back in the queue and look forward to the Analyst Day.

Thanks, Jed.

Our next question comes from Colin Rusch with Oppenheimer. Your line is open.

Thanks so much, guys. Can you quantify the exposure you have on natural gas prices relative to your PPAs, and how we should think about generation gross margins on a go-forward basis?

Good morning, Colin. This is Mike. So regarding our power purchase agreements, we look at our portfolio today, for a large part of that portfolio, the off-taker is actually procuring natural gas. As we look at some of our larger projects, for instance, the LIPA Yaphank project that came online this quarter, the company is fuel price exposed. However, we have contracts in place, so we have a seven-year fixed-price agreement, so we follow natural gas prices and will continue to extend that when it makes sense in the future. That’s really our strategy around mitigating increases in natural gas prices.

Yeah, Colin, just to add maybe a little bit to that, as a company where we do have gas exposure, right, we don’t take a fundamental view on gas prices. And so we work to hedge those risks off, and we’ll continue to do that. As years pass, we’ll hedge in more to limit that exposure. As you know, it’s challenging to get a 20-year long-term commitment on that gas and may not even be a good decision. But we actively manage how we hedge to mitigate those risks.

Okay, great. I have a couple of other nuanced questions I will take offline on that. So moving forward towards the product backlog, with the existing finished goods inventory that you have, how much of that backlog can really be met with the existing configuration that you have in that finished goods inventory? Or do you need to bring forward some developments on the technology to meet that backlog?

So, Colin, you’re asking about our current backlog of projects, which equates to almost 34 megawatts in backlog, correct?

Yes, with the product backlog that you guys have that you’re announcing the $60 million versus the existing inventory, can you indicate if all of the inventory that you have on hand can actually be sold against that product backlog, or if there are some product development endeavors needed to hit the specifications of the orders in that backlog?

So as you saw this quarter as a result of the settlement agreement with POSCO Energy, an order was placed for 20 modules. We shipped Ex Works six modules that came out of finished goods inventory and recognized $18 million of revenue. As of now, that’s our current configuration of 1.4 megawatt modules. We will continue over the course of this year to build inventory to satisfy the balance of that commitment. So no, we don’t need to implement any technology changes or configuration changes. It’s our standard 1.4 megawatt modules to satisfy service needs for POSCO’s existing fleet in Korea.

Super helpful. Thanks so much, guys.

Yep.

Our next question comes from Mark Strouse with JPMorgan. Your line is open.

Yeah, good morning. Thanks for taking our questions. Just a follow-up to Colin’s question. Can you help me reconcile the six modules that you’ve delivered to POSCO already and the eight that you’re expecting over the balance of the year? How do I tie that with the 20 modules that you’re expecting from POSCO?

Sure, Mark. Good morning. This is Mike again. The way the agreement with POSCO was structured was there are two orders that POSCO committed to affirm, which was placed in January for the initial modules, and then they committed to placing a second order for the balance of the 20 by the end of June 2022. So we would expect to see that second order by the end of June of 2022 as per the settlement agreement, and we’ll deliver against both of those this year.

Yes, Mark. The initial order is 12, and we’ve shipped six of those. The remaining eight will be ordered in June. However, we expect to deliver all 20 of those modules to POSCO Energy throughout 2022. Additionally, it is significant to note that through the settlement, we are the only source of providing those replacement modules on a go-forward basis. This positions us for additional opportunities in the future.

Okay, and that’s helpful. Can you talk about any inbound requests that you’re getting from customers outside of POSCO in that region?

Yes. If you think about our existing business in Korea, the customers were served by POSCO Energy through our channel partnership. The GENCOs are the actual customers in those markets. We see interest from those GENCOs, and we have been building out a sales team, which we didn’t have before because POSCO was our channel partner. We are actively engaged in real conversations about opportunities. The largest fuel cell platform in the world exists today, leveraging our technology in Korea, and it’s 59 megawatts, right? These are large-scale projects, and we feel quite positive about the technology's ability to serve the GENCOs given the megawatt scale and the attractiveness of the high-grade heat we can deliver from our existing platform.

Great. Okay, thank you very much.

Thank you.

Our next question comes from Laurence Alexander with Jefferies. Your line is open.

Good morning. Have you framed just how many megawatts of capacity are installed in Southeast Asia where replacement modules could be needed in the next three to five years?

In Korea, with customers originally served by POSCO Energy, there are about 140 megawatts installed that fall into that category that ultimately, beyond what module replacements POSCO Energy may have already done, will likely have additional opportunities for module replacements for the rest of the installed base.

Is the module replacement economics stable? Can we use the POSCO agreement as a proxy for the future economics?

Over time, you could probably use that as a watermark. Pricing may increase as time moves forward, but I wouldn’t expect downward movement on pricing. Time and market conditions will tell; I suggest maybe using that as a watermark today.

Our next question comes from Leo Mariani with KeyBanc Capital Markets. Your line is open.

Hey, guys, I was hoping you could provide a little bit more information about the nature of the delays at the Toyota plant. And when you might be able to get this up and running?

With respect to the Toyota project in Long Beach, California, that project is currently under construction. We anticipate delivery of that project is targeted for 2023, but expect to see substantial work completed around the construction of that project in this calendar year.

Got it, and just wanting to jump over to your 14 megawatt Derby Connecticut project. Do you have a better estimate of what the in-service plan is there in terms of date?

We have mobilized and launched the construction phase and site civil construction, as well as mechanical assembly of our Derby project. Significant progress has been made in equipment deliveries and mechanical assembly this year. In parallel, we continue to advance the electrical interconnection process required for this facility to come online. Both key milestone activities are continuing to advance well, and we anticipate commercial operation in 2023.

Okay, so a startup expected in 2023. Got it. On your Exxon JV, is that in the process of being extended or updated?

Yes, the current JDA is set to expire at the end of April. We are in discussions with Exxon about the next phase of what we do from both the development work that we’re doing, in addition to the prospects around the demonstration project in Rotterdam, which Exxon has publicly discussed. The milestone we hit is a mile marker indicating that the technology can capture carbon efficiently while producing power simultaneously. This gives us more confidence around the extended opportunity that exists between us and Exxon.

Would you expect revenues outside of POSCO in South Korea to be significant in fiscal year 2022?

In terms of timelines for projects, even if you secure an order of 60 days from now, it would take significant time to get into our production schedule, execute necessary shipping, permitting, construction. Therefore, it’s more realistic to view these as opportunities emerging in 2023 rather than 2022.

Our next question comes from Chris Souther with B Riley. Your line is open.

Can you talk about the Scotford project in Canada? Who you’re collaborating with the most there?

The lead for the Scotford project is Canadian Natural, CNRL. Our principal contact there is that it is a Shell Upgrader that is jointly owned between Shell and CNRL, among others, but operated by Shell. We are primarily working through CNRL on this project.

As we work on optimizing the performance of our stacks for carbon capture with ExxonMobil, we do have technology that is capable of performing carbon capture, and we believe that this project is a good demonstration opportunity.

Thank you for your interest.

Our next question comes from Praneeth Satish with Wells Fargo. Your line is open.

Just want to give us an update on your gross margin expectations for the year. How much of the gross margin in Q1 was weighed down by inflationary pressures?

In Q1, it really wasn’t weighed down by supply chain issues or cost pressures. Our long-term contracts for materials help mitigate this. However, we had a few specific factors impacting margins, like a $1 million impairment charge and about $2 million in variances and absorption costs when adjusting for product, leading to around a 16% margin on the sales of those modules.

If you could provide an update on your solid oxide commercialization progress and how it relates to applications?

We’ve demonstrated electrical efficiency of 92-plus percent with our solid oxide technology, and we are making more investments in the commercialization of that platform than ever before. Hydrogen will be an important part of the energy economy going forward, and our high-efficiency platform is well-positioned to serve heavy industrial applications.

Our focus has been developing a solid oxide platform that is versatile enough for power generation, electrolysis applications, and energy storage. We demonstrated power generation a couple of years ago, and we expect to further showcase our electrolysis capabilities this year.

Our next question comes from Eric Stine with Craig-Hallum. Your line is open.

Just curious if you could update the targeted breakeven megawatt level for the generation portfolio?

We haven’t put out a breakeven target. Our strategic positioning is built on long-term contracts that will produce recurring revenues and aid our EBITDA profile greatly. While we haven’t set a breakeven target, our margins are targeted in the 45-50% range.

Thank you, Eric.

We have run out of time for Q&A on today’s call. I’ll turn the call back over to Jason Few for closing remarks.

Chantelle, thank you. Thank you again for joining us today. We will continue to execute on our Powerhouse Business Strategy, working to deliver growth and optimize returns. The FuelCell Energy team is excited about our work to deliver on our purpose of enabling a world empowered by clean energy. We are excited to deepen the understanding of the company’s platforms, opportunities, and priorities next week during our Investor Day. Finally, I again want to offer our prayers and support to the people of Ukraine and all those impacted. Thank you for joining, and have a great day.

This concludes today’s conference call. You may now disconnect.