Fuelcell Energy Inc (FCEL) Q2 2022 Earnings Call Transcript

Good morning. My name is Julianne, and I will be your conference operator today. I would like to welcome everyone to the FuelCell Energy’s Second Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Tom Gelston, Senior Vice President, Finance and Investor Relations, you may begin your conference.

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 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 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 with respect to 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 the 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.

Thank you, Tom, and good morning, everyone. Thank you for joining us on our call today. In the second quarter, we made continued progress in executing our Powerhouse Business Strategy. Before I get into the results for the quarter, I always like to provide a brief overview of the company. As shown on Slide 3, in summary, what we do is decarbonize power and produce hydrogen. We do this as a leader in manufacturing stationary FuelCell platforms that leverage our proprietary technologies. We operate across three continents, and as we previously stated, we are focused on targeting new opportunities in new markets across the globe. In fact, just this week, we announced a collaboration opportunity in North Africa. Our manufacturing locations are currently located in the United States, Canada, and Germany, which we believe positions FuelCell Energy for local content requirements and efficient distribution, which is increasingly important given global supply chain constraints and clogged shipping ways. We have 95 platforms in commercial operation, which we believe demonstrate the commercial feasibility of our products. In fiscal year 2021, our revenue of nearly $70 million came from three revenue categories: service and licenses, Advanced Technologies, and Generation, all of which represent diversified sources of recurring revenue under multi-year contracts. Over the past two fiscal years, we have had no revenue from product sales. However, product sales returned to our revenue mix in the first quarter of this year with an initial order for 12 replacement modules to service POSCO Energy's existing installations in Korea, six of which were delivered in the first quarter of this year. We expect to deliver additional modules from the initial order in the third quarter of this year and pursuant to the terms of the settlement agreement with POSCO Energy, we expect Korea FuelCell to place a non-cancelable order for eight additional modules by June 30, 2022. We continue to target delivery of all 20 modules by the end of fiscal year 2022. With the Asian market once again open to us as a result of that agreement, we are optimistic that in the future we will see revenues from new product sales in Korea in addition to other Asian markets, as well as select countries in Europe, the Middle East, Africa, Latin America, and North America, where we have made it a priority to target product sales. On Slide 4, you will see our purpose. As a company, we are committed to our purpose of enabling a world empowered by clean energy. Today and in the future, every industry and company will be impacted by the transition to net zero, and we believe our technology is well-positioned. The world will always need reliable 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. We believe we can do this by decarbonizing power and producing hydrogen. We believe we have the only technology that can capture CO2 while producing power and hydrogen and produce hydrogen, power, and water simultaneously. FuelCell Energy’s technologies provide localized solutions for clean energy that deliver real-time benefits to the communities in which our platforms operate while reducing Scope 1 and 2 emissions. We do this in a manner that supports high standards of living and economic growth while protecting the environment, minimizing land use when 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. Now, I will move on to the key messages for the second quarter, beginning on Slide 5. We continue to make steady progress, advancing our strategic agenda, executing against our backlog, and working toward commercialization of new technologies. At the 7.4 megawatt project at the U.S. Navy Submarine Base in Groton, Connecticut, we have completed the commissioning process of one of the two platforms installed on site. The second platform requires additional component work, and when that's complete, we will then resume the final stage of commissioning. We expect the project to be commercially operational this summer, at which time it will be added to our Generation portfolio. When fully operational, the platform’s incorporation into the microgrid is expected to demonstrate the capacity of FuelCell Energy's platforms to increase grid stability and resilience. It will support the U.S. Military's effort to fortify its base energy supply while demonstrating the U.S. Navy's commitment to clean, reliable power with microgrid capabilities. Another key project is the 2.3 megawatt Tri-Generation platform we are constructing for Toyota at the Port of Long Beach that will produce electricity, hydrogen, and water. FuelCell platform equipment has been built and delivered to the site, and civil construction work has significantly advanced. We are nearing the completion of the construction phase of the project, with the remaining project activity anticipated to be completed in late 2022 or early 2023. As a result, while we have made substantial progress, we do anticipate that commercial operations will be delayed beyond June 30, 2022, and we will need to request and receive from Toyota an extension to the hydrogen power purchase agreement. When the project achieves commercial operations, this energy platform will deliver carbon-neutral electricity, green hydrogen, and water in a region experiencing extreme drought conditions, and we expect our project to improve the air quality in Long Beach, California, an area hampered by poor air quality. The hydrogen produced by our platform will provide the fuel needed to power the transportation sector in both passenger vehicles and Class 8 heavy-duty trucks. Once completed, this project is expected to be a real-world example of how distributed green hydrogen can be deployed to repower and refuel the transportation sector, including maritime, aviation, rail, busing, and more. During the quarter, we continued to invest capital in our internal R&D, much of which is focused on driving commercialization of our patented solid oxide platform to deliver power generation, electrolysis, and energy storage. Additionally, we are making progress in optimizing capacity for the carbonate platform, with the goal of achieving 100 megawatts of annualized integrated onsite manufacturing and conditioning capacity. The latter being a key recent development that is expected to lower costs while increasing throughput. Second, we are also continuing to focus on the advancement of carbon capture and carbon separation technology toward commercialization. Following the achievement of our critical technical milestone associated with our differentiated carbon capture application under the joint development agreement with ExxonMobil Technology and Engineering Company or EMTEC, we entered into an extension of our collaborative development agreement, enabling our companies to continue working to advance FuelCell carbon capture and storage technology. Additionally, we are also conducting a joint market study to define application opportunities and commercialization strategies and identify partners for potential pilot or demonstration projects as we pursue carbon capture across a broad landscape of industrial applications. During our recent Investor Day presentation and our 8-K filed with the SEC on March 21st, 2022, we highlighted that we believe the combined cumulative market for carbon capture leveraging our technology is approximately $1 trillion through 2030. We are also making progress with our first-generation carbon capture and storage technologies. This includes our work in the United Kingdom with Drax, one of the largest biomass power plants in the world to capture carbon, and Canadian National Resource Limited, a consortium of oil sand companies, and some supporting Canadian government entities. My third key message is that we are continuing to build our path forward in Asia. We continue to build our commercial organization in Korea in support of our efforts to build new opportunities in the broader Asian market. We believe that in Korea, FuelCell Energy’s differentiated technology is a highly desirable choice for utility-scale projects, given its high-quality thermal attributes that support the district heating requirements in the country. The Korean Government previously announced an aggressive hydrogen economy roadmap, which should create exciting opportunities in this market. In addition, Japan has also announced goals to expand hydrogen usage costs and supply targets. We look forward to bringing our unique distributed generation and distributed hydrogen platforms to the Asian market as Asia looks to lead in the hydrogen transition. Additionally, recall that last quarter, we reached a settlement agreement with POSCO Energy, which called for 20 replacement modules to be ordered during fiscal year 2022 to service its existing installed base. Six modules were delivered last quarter, and while none were delivered this quarter, we continued to target delivery of all 20 modules by the end of fiscal year 2022. And now I will turn it over to Mike to discuss the quarter financial results in more detail.

Thank you, Jason. And thanks to those that have joined our call today. Now I'd like to spend a few minutes providing some details on our financial results for the second fiscal quarter of 2022 beginning on slide seven. In the second quarter of fiscal 2022, we reported revenues of $16.4 million compared to $14 million in the second quarter of fiscal 2021, an increase of approximately 17%. Looking at revenues by category, consistent with our expectations there were no product revenues in the second quarter, as there were no modules delivered. We do expect product revenues in the third quarter as we expect to deliver additional modules from the 12-module order we received from a subsidiary of POSCO Energy in the first fiscal quarter of 2022. Additionally, pursuant to the terms of the settlement agreement with POSCO Energy, we expect a subsidiary of POSCO Energy to place a non-cancelable order by June 30th, 2022 for eight additional modules. We are targeting delivery of all 20 modules, of which six were delivered in the first quarter by the end of our fiscal year. Service agreements revenues increased 300% to $2.6 million from $700,000. The increase in revenues for the second quarter of fiscal 2022 is primarily due to the fact there was a refurbished module exchange and non-routine maintenance activities during the quarter. Generation revenues increased 46% to $9.1 million from $6.2 million, primarily due to the completion of the Long Island Power Authority or LIPA Yaphank Project during the three months ended January 31, 2022, and the higher operating output of the Generation fleet portfolio as a result of module replacements during the last six months of fiscal year 2021. Advanced Technologies contract revenues decreased 34% to $4.7 million from $7.1 million, compared to the second quarter of fiscal 2021 Advanced Technologies contract revenues recognized under the joint development agreement with ExxonMobil Technology and Engineering Company or EMTEC, formerly known as ExxonMobil Research and Engineering Company, were approximately $3.2 million lower during the second quarter of fiscal 2022 offset by an increase in revenue recognized under government and other contracts of $900,000 for the second quarter of fiscal 2022. Gross loss for the second quarter of fiscal 2022 totaled $7.3 million compared to a gross loss of $4.8 million in the comparable prior year quarter. The increase in gross loss was driven by higher manufacturing variances, $4.8 million of non-recoverable costs related to the construction of the Toyota project, and lower Advanced Technologies margin, partially offset by reduced Generation gross loss, excluding the impact of the non-recoverable costs related to the construction of the Toyota project and reduced Service gross loss. Operating expenses for the second quarter of fiscal 2022 increased to $20.9 million from $12.6 million in the second quarter of fiscal 2021, administrative and selling expenses increased due to higher sales, marketing, and consulting costs as the company is investing in rebranding and accelerating its sales and commercialization efforts, including increasing the size of its sales and marketing teams, which resulted in an increase in compensation expenses. Research and development expenses were $7.7 million during the second quarter, up from $3 million in the second quarter of fiscal 2021, reflecting increased spending on the company's hydrogen commercialization initiatives, namely acceleration of our commercial development efforts related to our solid oxide platform. Net loss was $30.1 million in the second quarter of fiscal 2022, compared to net loss of $18.9 million in the second quarter of fiscal 2021, driven by a higher gross loss and higher operating expenses. Additionally, interest expense was higher in the second quarter of fiscal 2022 compared to the prior year period. Adjusted EBITDA totaled negative $21.2 million in the second quarter of fiscal 2022, compared to adjusted EBITDA of negative $11.3 million in the second quarter of fiscal 2021. Please see the discussion of non-GAAP financial measures, including adjusted EBITDA in the appendix at the end of our earnings release. The net loss attributable to common stockholders in the second quarter of fiscal 2022 was $31 million or $0.08 per basic and diluted share compared to $19.7 million or $0.06 per basic and diluted share in the second quarter of fiscal 2021. The higher net loss per common share is primarily due to the higher net loss attributable to common stockholders, partially offset by the higher number of weighted average shares outstanding due to share issuances since April 30, 2021. Next, please turn to Slide 8 for additional details on our financial performance and backlog. The chart at the left-hand side graphically shows certain of the numbers we just reviewed for the second quarters of fiscal years '21 and '22. Looking at the right-hand side of the Slide, we finished the quarter with a backlog that was up slightly year-over-year to $1.33 billion, primarily as a result of the addition of product sales backlog, partially offset by a reduction of Service and Advanced Technologies backlog, and reflecting the continued execution of backlog and adjustments to Generation backlog. Specifically changes to backlog reflect the addition of product sales backlog from the module order received from a subsidiary of POSCO Energy and module exchanges in our Generation portfolio that are expected to contribute to higher future output and revenues. Our Advanced Technologies backlog reflects new contracts from the U.S. Department of Energy, partially offset by work performed under our joint development agreement with EMTEC. Turning to Slide 9, I would like to give an update on enhanced liquidity and the ongoing investment in our project assets. As of April 30th, 2022, we had total cash, restricted cash and cash equivalents of approximately $489.6 million. This includes approximately $467.8 million of unrestricted cash and cash equivalents represented by the darker blue bar on the chart in the center of the slide, and $21.8 million of restricted cash and cash equivalents represented by the lighter blue bar. About a year ago, in June of 2021, to strengthen our liquidity and financial flexibility, we commenced an at-the-market offering program with Jeffries and Barclays Capital to offer up to $500 million of our common stock. In the third and fourth quarters of last fiscal year, we sold approximately 44 million shares under the program generating net proceeds to the company of approximately $369 million. In the second fiscal quarter of 2022, we sold an additional 19.9 million shares of common stock, resulting in net proceeds of $118.3 million. Looking at the right-hand side of the slide, there is a chart illustrating our total project assets, which make up our company-owned generation portfolio. We intend to continue to develop, construct, and grow our portfolio of project assets. Investments to date reflect capital spent on completed operating projects as well as capital spent on projects currently in development and under construction. At the end of the second quarter of fiscal 2022, our gross project assets totaled approximately $264.1 million, which excludes accumulated depreciation. As detailed on Slide 19 in the appendix of this presentation, our Generation portfolio totaled 76.3 megawatts of assets as of April 30th, 2022. This includes 41.4 megawatts of operating assets and 34.9 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 seek additional long-term tax equity financing as well as back leveraged debt transactions to further reinvest capital back into the business. Please turn to Slide 10. As we previously shared during our Investor Day in March and in our public filings, we are targeting investments in three primary areas: capital expenditures, research and development, and continued build-out of our Generation portfolio. Capital spending will be in the areas of increased capacity expansion, additional tests and laboratory facilities, and upgrades to an expansion of our business systems. We are decreasing our estimated full-year CapEx to a range of $30 million to $40 million from an earlier estimate of $40 million to $50 million due to timing of certain investments that we now expect will be made in fiscal year 2023, rather than 2022. Looking at Research and Development, our R&D efforts are focused on commercialization of our hydrogen technologies, including long-duration energy storage. We are decreasing our estimated full-year R&D expenses to a range of $30 million to $40 million from an earlier estimate of $45 million to $55 million. We are committed to continuing the build-out of our Generation portfolio, which should benefit from the growth in recurring revenues as projects begin operation under power purchase agreements. As of April 30th, 2022, the company had 34.9 megawatts of projects under development in construction, some of which are expected to generate operating cash flows beginning in fiscal year 2022. To build out this portfolio, as of April 30th, 2022, we estimate the remaining investment in projects assets to be approximately $89 million. For fiscal year 2022, we forecast projects asset expenditures to be in the range of $40 million to $60 million. We expect these investments to result in growth for the company, and we believe that FuelCell Energy is well-positioned to participate in the accelerating energy transition. As discussed in our Investor Day, we have established targets for revenue in excess of $300 million by the end of fiscal year 2025, and in excess of $1 billion by the end of fiscal year 2030. In closing, we are pleased with the continued progress being made. At this time, while we recognize that there are some sectors that have the potential to be negatively impacted in the coming months, our current view is that the combination of our substantial backlog, recurring revenue from our fleet, and continued sales focus will keep us well-positioned for the future.

Thank you, Mike. On Slide 12, I want to reiterate the highlights of our Powerhouse Business Strategy, which is our guiding strategy for our journey toward long-term growth. The first tenant is growth. We want to pursue growth in markets and customer segments where we see significant opportunities for our technology. The second is scale. To achieve growth, we plan to scale our existing platform by investing in, extending, and deepening our leadership and total human capital across the organization. And third, innovate. We believe that our continued focus on innovation will enable our participation in the growth of the hydrogen economy and carbon capture markets. Two opportunities where we believe the combined cumulative market through 2030 is greater than $1.5 trillion, and we expect will help us deliver on our purpose. Our Powerhouse Business Strategy has evolved over the past couple of years to focus on growth. The energy transition is happening at an accelerated pace, and we believe our technologies will play an important role in helping society achieve our global sustainability goals. We are moving forward with 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. On Slide 13, we have provided more detail on how we are working to achieve growth by pursuing global opportunities. I am proud of the progress we are making as an organization and how we are growing our sales team and capabilities with the goal of achieving the long-term targets shared at our recent Investor Day. Part of this is optimizing our business, by which we mean capitalizing on our core technology strengths in key product markets. Just one example is the module cells to Korea FuelCell that we discussed today. These product sales utilize our existing technology and manufacturing processes to add meaningful revenue growth. One of our important goals has been to drive commercial excellence, and in support of this, I am very happy to have Mark Feasel, who recently joined our team as Executive Vice President and Chief Commercial Officer. I look forward to his leadership in helping to strengthen our customer-centric relationships and further build our sales opportunities across applications, customer segments, and geographic markets. To expand geographically and by market, we are focused on targeting opportunities in Korea and across Asia, Europe, as well as the United States, and geographies across the rest of the world. We have made significant progress in building our sales force in Asia with the goal of increasing our sales opportunities in that region. We also added Parimal Parimal as SVP, Chief Corporate Development Officer as we pursue our multi-pronged growth strategy, and John Torrance, SVP, Solid Oxide Manufacturing, as we commercialize and scale solid oxide. In February, we published our first sustainability report, and I want to highlight that our dedication to achieving net zero remains in the forefront. We are committed to achieving net zero on Scope 1 and Scope 2 emissions by 2030 and Scope 3 emissions by 2050. We are aligned with the leading standard organizations and the UN Climate Action goals that we can impact. Beyond our environmental commitments, we are equally focused on our teammates, the people, and the communities in which we work and live, and be in a diverse, equitable, and inclusive organization. This commitment is shared across our company and our Board in every aspect of our business. Finally, to conclude my remarks on Slide 15, we have executed several strategic actions to strengthen our balance sheet, enhance liquidity, and reduce our cost of borrowing, which we believe have positioned the company to execute on our growth strategy. We have well-established relationships with financing providers. We continue to expand our source of liquidity, as evidenced by our tax equity transactions we discussed today, and the liquidity provides the company with the flexibility to scale our operations and make investments in commercializing technologies as well as sales and marketing. We have $1.3 billion of backlog with recurring revenues from long-term contracts. We believe that our technologies have a 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. Finally, we intend to be a leader in sustainability and environmental stewardship through the technology we deliver and the full life cycle of our platforms. I will now turn it over to the operator to begin Q&A.

Our first question comes from Colin Rusch from Oppenheimer & Company.

Can we get an update on your plans to monetize the carbon capture technology beyond the development agreement? I'm just curious how things are emerging in a little bit more concrete way as you continue to make a lot of progress there.

Sure, Colin. As we announced, we have extended our agreement with Exxon for the remainder of this year. One significant change is that this extension includes the development of a joint marketing and commercialization plan for the technology. We are currently focused on identifying customer segments and geographical areas to target as the first phase of the technology, aiming to effectively capture carbon for industrial applications as our primary goal. This includes applications like the project we are undertaking in Canada, where we capture carbon from an upgraded boiler, which may be used in refining, petrochemical applications, or other manufacturing processes. The effort will also aim to demonstrate the technology in various regions and across different market segments. Our plan will encompass a comprehensive solution, addressing not just carbon capture, but also the infrastructure necessary to transport CO2 to a sequestration site, including the subsurface technology we will utilize for this process. Overall, we will develop a thorough strategy for commercializing the technology and advancing it.

That's super helpful. And then now that you've got some additional sales resources working on PGR. Can you talk a little bit about the competitive dynamics and where you guys are competing well, where you might need to make some changes in terms of growing that business on the product side and really driving some.

Yes, absolutely. When we analyze our business, we can divide it into the U.S. and international markets. Approximately 40% of our opportunities are in the U.S., while 60% are found in other regions, including the EU, the Middle East, Africa, Latin America, and Asia. In terms of specific applications, we recognize utility opportunities across all these markets. For instance, in the food and beverage sector, our capability to provide CO2 from a utilization perspective, rather than just sequestration, is significant. A recent report indicated that CF Industries is closing one of its fertilizer plants in Cheshire, which will affect not only fertilizer and food supply but also CO2 availability for meat processing. We believe these applications present substantial opportunities for us on a global scale. In the U.S., there is an increasing focus on microgrids for improved resilience and reliability, where we feel we are competitive and have various proven applications. Moreover, the biofuels sector continues to show promise for us due to our unique capabilities, especially in the carbonate area. Looking at international markets, particularly Korea, we see a considerable opportunity in district heating and cooling, as it plays a significant role there. Additionally, there is strong interest in distributed hydrogen, with multiple production methods being explored. Even beyond the U.S. hub concept stemming from the infrastructure package, we identify a demand for distributed hydrogen production from fuel sources. As we advance the Toyota project, we are witnessing notable interest in port applications for ship-to-shore resources and distributed hydrogen for goods movement at ports, which is evident not only in the U.S. but in other regions as well. There is also significant interest in electrolysis, as seen in our recent announcement regarding a project in North Africa that focuses on our electrolysis technology, utilizing the ample sunlight in the region and pipelines to transport hydrogen to Italy and the EU markets, for example.

Our next question comes from Laurence Alexander from Jefferies.

This is actually Kevin Astock on for Laurence Alexander. So my first question is sort of broad and has to do with green and blue hydrogen. I guess a bit of the Toyota project. I guess I'm just curious to hear how long you think it would take to build out further green hydrogen capacity. And I guess that's something you thought you might be interested in? And my second question has to do with gross margins. Basically, when do you expect them to turn positive? And any commentary there would be helpful.

Yes. So when we think about green hydrogen or blue hydrogen or pink hydrogen, you can kind of pick a color. We really try to think about it more from a carbon intensity standpoint because we think that's really a better way to think about hydrogen and the hydrogen that's going to be delivered for particular applications or use cases. In the case of the Toyota project, because we're leveraging RNG, we're delivering green hydrogen; we're delivering carbon-neutral power and water on that project. And we think that those kinds of projects are going to continue to be real opportunities for us, both domestically and internationally. And so we think there's an opportunity to maybe move those projects forward more rapidly versus some of the pure green electrolysis hydrogen projects because one of the things that's still a bit of a challenge you have there is infrastructure for moving that hydrogen without putting it in a tube trailer and putting it on a truck and moving it. And so there's work that still needs to be done there, but we think our ability to do distributed hydrogen even leveraging fuel and deliver green hydrogen in that application will be a strong opportunity for us. And yes, we are very interested in more of those opportunities and expanding that both domestically and internationally. And maybe I'll let Mike talk a little bit about the margin profile.

Thank you, Jason. From a margin perspective, let me go through the line items on our profit and loss statement. This quarter, as expected, we did not record any product revenue. In the previous quarter, we had $18 million in product revenue from a subsidiary of POSCO Energy, which resulted in approximately 18% margins. We anticipate fulfilling the remainder of that $60 million order by the end of our fiscal year, which will contribute to additional revenue and margin. This quarter, service revenue was about $2.6 million with negative margins. Service is variable, and as our fleet grows, we expect to see positive margins; typically, margins at this stage are negative to flat. In terms of generation, we are dealing with two main factors: depreciation and expenses related to the Toyota project. We assess generation primarily on an EBITDA basis, usually targeting EBITDA margins around 40% to 50%. If we exclude the previously mentioned items, this quarter's EBITDA margins are approximately 42%. Lastly, Advanced Technologies has consistently shown positive margins. This area includes our collaboration with EMTEC or ExxonMobil, and this quarter, margins from Advanced Technologies were around 25%.

Our next question comes from Noel Parks from Tuohy Brothers.

I have a couple of things. One is that there was a mention earlier about module exchanges in the Generation portfolio. And how much visibility do you have into the timing of those?

This is Mike. I’ll answer that. When considering our Generation portfolio, it's important to note that these are typically long-term assets, usually around 20 years, and they are retained on the company’s balance sheet. We keep the Generation portfolio to capitalize on the consistent long-term cash flows it provides. Recently, we've observed an increase in revenues from this portfolio as new projects have begun operations, such as the LIPA Yaphank project that launched in the first quarter, contributing to the higher revenue figures. As we continue to expand our fleet, we expect to see further revenue growth from this portfolio.

The module exchanges are fairly predictable in terms of economics.

I'm sorry. Just to follow on to the module exchanges. So over the course of the power purchase agreement, we will replace modules, and the way our technology works is the current life cycle of modules that we're deploying today is around seven years. So we have visibility to be able to plan out those module exchanges. And when they occur, that will lead to higher revenue because the module essentially degrades about 10% over its life. So you're seeing slight reductions in revenue over time. And then when the new module comes online, that's what leads to the revenue increase. Sorry, I wasn't clear in my first answer there.

No problem at all. And I just wanted to touch on the Toyota project. You've mentioned a couple of times about the booking of cost for that. And just looking ahead of it, is there a shift in how the costs get represented upon or approaching final commissioning that we'll see in the future?

Regarding the Toyota project, we have not yet secured a renewable natural gas contract, which means we cannot fully estimate the project's economics. Over the past several quarters, we have been capitalizing recoverable costs, primarily associated with the power plant, while expensing site work and what we categorize as nonrecoverable costs. As we approach commissioning, the company is focused on securing a renewable natural gas source, which will clarify the project’s economics and may allow us to capitalize additional costs, depending on future economics. We do anticipate that the project will generate positive cash flow or EBITDA in line with the projections I previously mentioned for our other projects, but, as noted, we are currently expensing part of the capital costs associated with this project.

Great. And I just wonder sort of as a general topic. We have been hearing more, I guess, over the past six months or one year about hydrogen hub projects, many of them sort of independently financed; there is also potential support from the infrastructure bill in the mix. I just wonder, as you see those developing across different regions, just where those trends might fit in with what you foresee for hydrogen adoption overall and whether those would have an influence on your own business?

Yes. Noel, this is Jason Few. Look, we think the hydrogen hubs are an exciting opportunity. If you look at the infrastructure package that was actually signed by President Biden, there's about $9.5 billion allocated toward hydrogen-related items, everything from these hydrogen hubs, which is roughly about $8 billion. And then you've got another $1.5 billion between infrastructure and additional R&D kind of allocated out of that total $1 trillion-plus infrastructure package. The original intent or what was described by the DOE was to do four hydrogen hubs around the country; kind of conventional wisdom right now is that's probably going to be at least eight. And what you've seen are a number of states and/or entities kind of pair up to actually be in a position to submit programs or proposals to the DOE to win those hydrogen hub opportunities. So as an example, we are participating in a number of those. But just to give an example, in Connecticut, we're part of one that includes Connecticut, New Jersey, New York, and Massachusetts as an example. And so if you consider that, the Northeast corridor, the plan is to put together a program that will be compelling for the DOE to want to support that project, and there will be funding from the DOE, there will be funding from the companies in the States to try to make those projects successful in demonstrating hydrogen production and utilization. And one of the things, as you think about the DOE, what they've indicated that they want to do is show hydrogen production from a multitude of sources. So just to give you a perspective for our company, we can demonstrate, as we're doing with Toyota, the ability to produce hydrogen utilizing fuel. So that might be one way that the DOE is interested in showing distributed hydrogen being produced via fuel, perhaps for transportation application or some other use for that hydrogen. They also want to be able to show hydrogen production from renewable energy like wind and solar. So that's where technology that we're working to commercialize, like our electrolysis platform, could be utilized to demonstrate converting renewable energy and water into hydrogen and then using that hydrogen potentially for power production or using that hydrogen as a potential replacement fuel for manufacturing steel or using it in gas blending applications to bring down the carbon intensity in that gas. So a number of different ways we think these hubs are going to come together. We're participating in a number of those. The DOE's RFP, if you will, has not come out yet, so everyone is waiting on that. And that really will kick off the process in earnest.

Our next question comes from Eric Stine from Craig-Hallum.

So maybe just sticking with Toyota. Could you just go into a little more detail? I know you said you're almost done with construction, but there are a few more steps left, and you need to get an extension on the PPA. I mean, do you anticipate any challenges on that? Or what are kind of the next things we should look for going forward?

Yes. Eric, this is Jason. And maybe, I'll just start, and then I'll turn it over to Mike Lisowski to maybe talk about the project itself. We are making very solid progress on the project. And as we indicated, we're close to on the mechanical side. We believe that Toyota remains very committed to this project. And this is just part of the process in these projects to work through extensions or those types of things. I mean, if you think about this project and you go back to the very beginning, as you may recall, we were initially delayed as a result of some issues with the utility wanting to challenge the PUC. So we had to work through those issues, that really began the initial delay in this project. And so I think both Toyota and FuelCell have worked through extensions previously in this, and we think that we'll get through this as well, and we think that they remain very committed to the project. And in fact, I mean, if you were to actually be at the Port of Long Beach right now, you would see a pretty impressive view of the platform that's there. And so I think they're excited as are we. Mike, I don't know if you want to talk about the projects more.

Thank you, Jason. And thank you, Eric, for the question. This is Mike Lisowski, Chief Operating Officer. I'm proud of the progress we've made on this project. To elaborate, the platform design is complete, all the engineered equipment and skids have been fabricated, built, and delivered to the site. The civil construction is nearing completion, and all mechanical equipment is currently being assembled and connected. We've also started the electrical assembly work. Moving forward, once we achieve mechanical completion, we will begin the commissioning process, which will involve carefully bringing the plant up and ensuring it operates commercially, likely by the end of this calendar year or early next year. As mentioned, the progress at the site is impressive, and we are continuing to work collaboratively with Toyota on this project as we look toward commercial operation.

I understand there is a lot of activity and competition in renewable natural gas, but are you not particularly concerned about securing an RNG contract to supply the facility?

No. Look, we think that getting RNG is not going to be a challenge for the facility, just given the volumes that are there, the number of projects that are going on in California. We think that there's going to be continued development around RNG. And I mean, the other thing that you're seeing, which we think is a positive, is you're seeing the major integrators getting into the RNG space in a major way. And we believe that they're going to participate in this area at large volumes because that's what they do. And so we feel pretty good about that.

Yes, absolutely. Okay. Well, then maybe lastly for me, just on the product side. I know you're certainly focused on that and have the amended agreement with POSCO. But I'm curious, you're clearly more positive now. Can you provide any details regarding quoting levels or the pipeline? I'm also not sure if you're willing to predict when you might see some product momentum outside of the replacement modules.

Yes. Here's what I would say about that and as you know, we don't give forecasts on that. But what I would say is we think the sales cycle is a 12-month, 18-month kind of sales cycle, although we terminated our agreement, for example, with POSCO in, I think it was June of 2021 or something like that. We still had that overhang out there between the dispute that we had going, and now that that's resolved, I would tell you the engagement level from prospective customers as well as existing is much stronger now that that cloud has lifted. And so we feel really good about that. And then just in general, our focus in growing our sales team and having a focus in broader markets around the world, which tend to be more product purchase markets than PPA markets, as has been our traditional experience in the EU, we would expect that to continue, and we would certainly expect to see that in other parts of the world where we're expanding the business.

We have no further questions in queue. I'd like to turn the call back over to Jason Few for closing remarks.

Julianne, thank you very much. I appreciate that and really want to thank everyone for joining the call today. We will continue to execute on our Powerhouse Business Strategy with the goal of delivering growth and optimizing returns. The FuelCell Energy team is excited about our work to deliver on our purpose of enabling a world to be empowered by clean energy. Thank you for joining, and have a great day, and we look forward to speaking to you again next quarter. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.