Earnings Call Transcript - FCEL Q1 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the FuelCell Energy's Q1, 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Tom Gelston, Senior Vice President of Investor Relations. Thank you. Please go ahead, sir.

Tom Gelston, Senior Vice President of Investor Relations

Thank you, good morning, and 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 first 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 have posted a slide presentation on our website. This webcast is being recorded and will be available for replay on the company’s website approximately two hours after we conclude the call. Before we begin our prepared comments, please direct your attention to the disclosure statement on Slide 2 of the presentation, and the disclaimers 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 the liability established by the Private Securities Litigation Reform Act of 1995.

Jason Few, President and Chief Executive Officer

Thank you, Tom, and good morning, everyone. Thanks for joining us on our call today. Each quarter, we include a brief overview of the company shown on Slide 3 for new investors. Taking a look at the full year fiscal 2020, which ended on October 31, our total revenue grew by double digits to approximately $71 million. Our three largest categories, servicing licenses, advanced technologies and generation, represent diversified sources of recurring revenue under multiyear contracts with investment-grade customers. Consistent with our strategy, in future quarters we expect the work we have done to rebuild our business development and go-to-market capabilities, recruit and onboard strategic talent and reenter and build client relationships and target global markets to yield growth, including product sales. We are optimistic about the momentum behind the global energy transition that we expect to be enabled by distributed generation, distributed hydrogen, long-duration hydrogen energy storage and carbon capture. At the top of the slide, we highlight many of our customers currently utilizing our multi-feature FuelCell platforms. Many of these systems integrating our capabilities create very high energy efficiency levels, while others form the backbone of microgrids, enhancing resiliency and reliability, and/or utilize biofuel resulting in carbon-neutral to carbon-negative power. We believe that the distributed nature of our hydrogen platform can enable the hydrogen economy in advance of midstream infrastructure availability. FuelCell Energy offers diversification across fuel cell technologies that enable solutions across multiple applications. Additionally, we continue to advance the commercialization of our solid oxide fuel cell platform to produce hydrogen, through highly efficient electrolysis, long-duration hydrogen-based energy storage, and zero-carbon hydrogen power generation. We believe that these technologies can provide the firm capacity required to support intermittent renewable technologies, such as wind and solar, by converting the off-peak energy occasionally generated by renewables or excess energy produced in excess of demand into hydrogen that is stored and later sent back to the same fuel cell stack to produce zero-carbon power. Recently, the world watched the disruption and loss of life in Texas caused by unavailability of power. FuelCell Energy is committed to delivering baseload power installations across our carbonate and solid oxide platforms that can and have demonstrated their ability to reduce the likelihood of similar events in the future. We stand ready to support customers around the world. Next, moving to Slide 4, I want to highlight our commitment to our purpose of enabling the world to live a life powered by clean energy. We believe all people around the world will increasingly need reliable, always-on power. The electric grid continues to evolve, but grid reliability remains a critical issue. We believe that FuelCell Energy is uniquely positioned to meet the reliability challenges with our broad product portfolio, that can also assist with decarbonization goals. We don't subscribe to the notion that decarbonization has to mean deindustrialization, or that developing countries around the world can't participate in an industrialized society. This purpose drives our strategic focus and the work we do. Turning now to the quarter, I have three overarching messages. The first is that we are continuing to make progress against our $1.27 billion backlog. As we execute our Powerhouse business strategy by working to complete and thus add another 40.7 megawatts to our generation portfolio. Subsequent to quarter-end, with the addition of our new 2.8 megawatt PPA for our second project in Derby, Connecticut, our backlog has increased to 43.5 megawatts. We have completed the majority of our scope of work on the 7.4-megawatt project at the U.S. Navy base in Groton, Connecticut. The company is currently awaiting the interconnection and other safety-related work to be completed prior to the commissioning and commercial operations. The interconnection agreement for this project is a four-party agreement and has taken longer than originally estimated to complete. FuelCell Energy looks forward to fortifying the power infrastructure supporting base resiliency and the U.S. Federal Government's defense critical electrical infrastructure objectives. Additionally, construction activity has been substantially complete for a 1.4-megawatt project at the San Bernardino, California Wastewater treatment facility that will utilize onsite biofuel to produce carbon-neutral power. We're working with the local utility on the interconnection process prior to commissioning and commencing commercial operation. I want to provide more color on interconnection for those less familiar with the process. Essentially, prior to being able to operate in parallel with a utility grid network, a series of studies such as feasibility, impact, and distribution studies are required to be performed by the appropriate local utility for distribution-level interconnects, or, in some cases, by the regional transmission organization for larger or grid-connected projects. These studies assess the addition of the power generation platform and its impact on the existing utility power system, as well as identify any interconnection facilities or network upgrades needed for interconnecting the platform to the utility grid. We proactively manage every aspect of the interconnection process within our scope and responsibility to obtain interconnection as quickly as possible while ensuring compliance with all safety and reliability requirements. The second key message I want to highlight is the progress we've made toward bolstering our financial foundation, strengthening our liquidity and creating an opportunity to reduce our cost of capital. As we have previously disclosed during the quarter, we completed an additional equity offering resulting in net proceeds to the company of approximately $156 million. And third, I want to reiterate our goal of strengthening our leadership in sustainability and environmental stewardship. Customers around the world are increasingly looking for authentic, onsite and sustainable decarbonized energy solutions to address climate challenges, enhance grid reliability, and enable them to continue to operate their businesses without intermittent disruptions. To meet the growing global need for clean decarbonized energy, FuelCell Energy remains focused on developing and deploying our product portfolio solutions for some of the largest global energy opportunities. A recent technology milestone has been the commencement of operation and testing of our prototype SOEC or Solid Oxide Electrolysis Platform in Danbury, Connecticut. Today, the platform is successfully and efficiently converting electricity and water into hydrogen. We also intend to continue to strengthen our leadership position in distributed generation, distributed hydrogen and carbon capture. And now, I will turn the call over to, Mike, to discuss our financial results in more detail.

Mike Bishop, Executive Vice President and Chief Financial Officer

Thank you, Jason. Let's begin by reviewing financial highlights for the quarter, shown on Slide 7. In the first quarter of fiscal year 2021, we delivered $14.9 million in total revenue, a 9% decline compared to the first quarter of fiscal year 2020. The primary driver of the decrease was that the first quarter of fiscal year 2020 included $4 million of non-recurring licensed revenues associated with our Joint Development Agreement with ExxonMobil Research and Engineering Company related to carbon capture technology development. Looking at revenue drivers by category, service and license revenues decreased 12% to $4.9 million from $5.6 million in the prior year period. Revenue recognized in the first quarter primarily includes revenue recorded for module replacements and routine maintenance activities, whereas revenue recognized in the first quarter of fiscal year 2020 included non-recurring license revenues of $4 million, associated with our JDA with EMRE, and $1.6 million associated with routine monitoring and maintenance activities for projects under service agreements. Generation revenues decreased 10% to $4.9 million due to a temporary shutdown of several individual plants at the Bridgeport Fuel Cell project for scheduled module exchanges in the quarter. Advanced technology contract revenues decreased 3% to $5.1 million from $5.2 million compared to the first quarter of fiscal year 2020. The increased revenues under the JDA were offset by $400,000 of less revenue recognized under government contracts in the first quarter of fiscal year 2021 compared to the first fiscal quarter of fiscal year 2020. Gross loss for the first quarter of fiscal year 2021 totaled $3.6 million compared to a gross profit of $3.3 million in the prior year quarter. Results for the quarter of fiscal year 2021 reflected no license revenues under the JDA during the quarter, as well as the temporary shutdown of several plants at the Bridgeport Fuel Cell project for module exchanges during the quarter. Operating expenses for the first quarter of fiscal year 2021 increased to $10.8 million from $6.4 million in the first quarter of fiscal year 2020. Administrative and selling expenses in the first quarter of fiscal year 2021 included additional stock-based compensation expense of $800,000 tied to grants made in 2020, and an increase in the value of a deferred director compensation liability due to the increase in the company's share price. The first quarter of fiscal year 2020 included a legal settlement of $2.2 million, which was recorded as an offset to administrative and selling expenses. Research and Development expenses of $1.8 million during the quarter reflected increased spending on the company's hydrogen commercialization initiatives. Loss from operations totaled $14.4 million compared to $3.1 million in the prior year period. Net loss for the quarter totaled $46 million compared to a net loss of $40.2 million in the first quarter of fiscal year 2020. Net loss attributable to common stockholders for the quarter totaled $46.8 million or $0.15 per basic and diluted share, compared to a net loss attributable to common stockholders of $41.1 million or $0.20 per basic and diluted share in the comparable prior year period. 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 from share issuances since January 31, 2020. The net loss per share in the first quarter of fiscal year 2021 includes the change in fair value liability associated with the warrants issued to lenders under our now extinguished credit agreement with Orion Energy Partners of $16 million, accounting for approximately a $0.05 per share impact on the reported net loss per share. The net loss per share in the first quarter of fiscal year 2021 also included a loss on the extinguishment of debt and the loss on extinguishment of preferred stock obligations from a subsidiary, together totaling $12.1 million, or a $0.04 per share impact on the reported net loss per share. Adjusted EBITDA totaled negative $7.4 million in the first quarter of fiscal year 2021, compared to adjusted EBITDA of negative $200,000 in the first quarter of fiscal year 2020. Please see the discussion of non-GAAP financial measures including adjusted EBITDA in the appendix of our earnings release. Prior to leaving this slide, I would note that the pictures on the right showcase the progress that we've made on a 7.4-megawatt platform, at the Navy sub-base in Groton, Connecticut. Next, please turn to Slide 8 for additional detail on financial performance and our backlog. The chart on the left-hand side of the slide graphically displays the numbers I walked through for the first quarters of fiscal years 2020 and 2021. Looking at the right side of the slide, we finished the quarter with a backlog of approximately $1.27 billion, a decrease of 7%. Subsequent to the end of the quarter, the company entered into a 20-year power purchase agreement with a United Illuminating for a 2.8-megawatt project in Derby, Connecticut, awarded as part of the competitively bid state-sponsored shared clean energy facility program. This platform will supply 2.8 megawatts of clean baseload power to the Connecticut electric grid, enhancing resilience, and is our second project located in Derby. This contract is not included in the company's backlog as of January 31, 2021, but is expected to add $59.4 million in future revenue to the company's reported generation backlog going forward. Turning to Slide 9, I would like to highlight the steps taken as part of our Powerhouse business strategy to provide additional liquidity, with the goal of enabling us to focus on the execution of our business plan, including building out our backlog of generation projects, commercializing our advanced hydrogen technologies, and expanding our go-to-market activities. As of January 31, 2021, cash, restricted cash and cash equivalents totaled $209.6 million, of which $31 million was restricted cash and cash equivalents. During the quarter, we completed an equity offering resulting in the net proceeds to the company of approximately $156.4 million. This offering allowed us to extinguish our seniors secured credit facility with Orion Energy Partners and to pay off the Series 1 preferred share obligation that one of our subsidiaries owed to Enbridge Inc. The net proceeds from the offering may also be used to accelerate the development and commercialization of our solid oxide platform and for project development, project financing, working capital support and general corporate purposes. In addition, our improved capital structure provides for lower interest expense, the elimination of the Series 1 preferred dividends, and increased flexibility of project financing. On the right side of the slide, we have included a chart illustrating our total project assets, which make up our company-owned generation portfolio. Investments today, include capital spent towards completed projects, as well as in-flight development projects. As of the end of the first quarter of fiscal year 2021, our gross project assets totaled $197.5 million. As itemized on Slide 21, in the appendix of this presentation, our generation portfolio totaled 73.3 megawatts of assets as of January 31, 2021. As projects in development come online, such as the Groton, 7.4-megawatt platform that I previously highlighted, they are expected to contribute higher revenue and adjusted EBITDA. Higher revenue and positive adjusted EBITDA are two aspects of our goals described on Slide 16 of this presentation. Also, as projects become operational, we expect to execute long-term financing at an efficient cost of capital, thus, recycling cash back to the company to redeploy into other projects or growth development activities. In closing, we are pleased with the progress that we've made under our Powerhouse business strategy. We have a strengthened financial foundation, allowing us to focus on driving commercial availability of our advanced technology solutions, including distributed hydrogen, electrolysis, and hydrogen production, and long-duration energy storage, and to focus on expanding our geographic markets while also executing on our plans to deliver on our project backlog. I will now turn the call back over to Jason.

Jason Few, President and Chief Executive Officer

Thanks, Mike. As mentioned previously, we are near completion of two new power platforms, one at the U.S. Navy base in Groton, Connecticut, and one zero-carbon biofuel platform at the Wastewater Treatment Facility in San Bernardino, California. Our SureSource 1500 and SureSource 3000 power platforms are the only fuel cell system certified to carbon emission standards under the distributed generation certification program for operations with onsite biogas. We also began early-stage construction of 24.5 megawatts of projects including the Toyota Hydrogen project at the Port of Long Beach and utility scale projects in Yaphank, on Long Island in New York and Derby, Connecticut. We are also advancing the development of new technologies including operating and testing a prototype solid oxide electrolysis hydrogen platform in Danbury, Connecticut, and continue to advance our joint research with EMRE on fuel cell carbon capture solutions. Turning to Slide 11, I want to take a moment to highlight the strong resiliency characteristics of our SureSource platform. As I mentioned earlier, recent headlines in Texas surrounding extreme weather, as well as continued challenges for grid reliability in markets such as California, or an extreme freeze experienced in the UK in February, continue to expose the inherent challenges of a long-distance transmission-based grid. Our platforms not only run 24/7, 365, but have demonstrated their performance stability during some of nature's more extreme conditions. On the right is an example of one of these installations, a SureSource 3000 located on the campus of the University of California, San Diego. As part of a microgrid solution, it helps provide energy security to more than 40,000 students on its approximate 1,000-acre campus. And beyond power, the University uses the thermal attributes of our platform with a heat exchanger being used to drive absorption chillers to provide cold water to the campus. This installation along with our microgrid installed at the Jail in Santa Rita, California, were highlighted as being two world-class examples of microgrids that deliver on their promise of providing always-on power having continued to provide power during public safety power shut-offs. On Slide 12, I want to again remind everyone of the four major market opportunities that FuelCell Energy is pursuing: distributed generation, distributed hydrogen and long-duration storage, and carbon capture. We believe that each of these has a very large total addressable market opportunity, for which we are working to position the company to benefit. We continue to advance research and development of our carbonate fuel cell platforms' efficiency, capturing carbon from an external source, while also producing power. Our proprietary carbon capture solution is the only solution that we know of, that captures carbon from an external source and produces power rather than consuming it, and is also capable of producing hydrogen for distributed applications. I also want to take this opportunity to spend more time on our hydrogen focus, including technology in the process of being tested, and advanced for commercialization. So turning to Slide 13, you will see a visual illustration of how FuelCell Energy will deliver hydrogen across three of our platforms. Our permanent platform, featured on the right side of this slide allows us to deliver hydrogen through our Trigen hydrogen platform. The first half of the word Trigen is important because the platform delivers three value streams to our customers. First, it delivers power. Second, it produces hydrogen. And third, it actually produces water while delivering hydrogen, adding more value in areas where water flow electrolysis is at a premium, which, as previously stated, we believe makes it the only platform in the world that produces both water and hydrogen. The Trigen platform can deliver green, blue, and gray hydrogen. We're in the process of building the first commercial installation of this platform for Toyota at the Port of Long Beach today. When the co-production of power is not required, our carbonate platform is being developed to produce green, blue, or gray hydrogen through a reformer electrolyzer purifier process or REP. Our solid oxide technology, pictured here is designed to produce green, blue, and gray hydrogen through highly efficient, high-temperature electrolysis. The breadth and depth of our developing technology portfolio positions FuelCell Energy to deliver distributed hydrogen across several environments around the world. The flexibility we expect to provide around distributed platform, source and price of hydrogen will enable us to add value in almost all energy segments globally. The versatility of our developing platform configurations allow FuelCell Energy to serve transportation, industrial applications, natural gas decarburization and substitution, repowering existing power infrastructure, and serving as a stationary power generation source and other processes not suited for electrification. Slide 14 provides a more detailed overview of our solid oxide platform. The prototype unit pictured here is a system currently operating in our Danbury, Connecticut headquarters for testing of various platform design elements. This year, we will build a larger version of this solid oxide electrolysis fuel cell for delivery to the Idaho National Labs under a cooperative funding agreement with the U.S. Department of Energy. The DOE project will incorporate a multi-stack electrolysis system utilizing our solid oxide technology. The system will also be equipped with an option to receive thermal energy, thus expected to increase the electrolysis electrical efficiency from about 90% to approximately 100%. Following the design, manufacture and testing of the system at FuelCell Energy facilities, the electrolysis system will be delivered to Idaho National Laboratories, where it will undergo rigorous testing to confirm the electrical efficiency, as well as the ability to utilize nuclear power plant waste heat to obtain 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, we believe up to gigawatt scale. On Slide 15, I want to briefly review our Powerhouse business strategy, which is based on the three core pillars of transform, strengthen, and grow. When we introduced the Powerhouse business strategy, we provided our plan to reposition FuelCell Energy to capitalize on the energy transition. The Powerhouse business strategy serves as the guideposts for the turnaround we are architecting at FuelCell Energy. We are approximately 15 months into our journey, and we are pleased with our progress to date. The first phase of our plan was to transform the company to build a durable financial foundation and enhance financial results. We have taken a number of important steps to strengthen the balance sheet, allowing us to finance completion of new projects and lower our cost of capital. Currently, we're focused on strengthening stage of our strategy, by driving operational excellence throughout the business and making capital investment decisions that further enhance our performance and advance product commercialization. And our third pillar to fully deliver on the Powerhouse business strategy we outlined is achieving growth over the long term by seeking to penetrate market and customer segments where our technology platforms can be the preferred solution. Our production operations are well-positioned for further capacity expansion and will generate operating leverage as we ramp our production rate and support future business growth. And supportive of our growth goal to achieve geographic and market expansion including Europe, FuelCell Energy has announced it has joined Hydrogen Europe, the leading European association representing the interest of the hydrogen and fuel cell industry, and its stakeholders reinforcing our commitment to the European market, and providing a platform for European customers to better understand the value of our broad platform portfolio. Turning to Slide 16, we will continue to work toward our 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 approximately 41-megawatt project backlog, and advancing commercial operations for each of those projects, which are expected to deliver recurring revenue through power generation and long-term service agreements. As I have explained in today's presentation, we are pursuing commercialization of our advanced technologies around REP and solid oxide hydrogen, and extending our carbonate carbon capture platform for solutions for capturing carbon from external sources and internally from the fuel cell, each of which offers potential growth opportunities for our company. I will conclude my remarks today by reviewing key investment highlights for FuelCell Energy. We have executed several strategic actions that strengthen our balance sheet by repaying debt, enhancing liquidity and reducing our borrowing costs, which we believe positions the company to execute on our growth strategy. We have a strong multi-discipline team across our company that is focused on taking care of our customers, achieving financial milestones, executing on our backlog, winning new business globally, advancing commercialization of our differentiated platform solutions, driving down the total cost of customer ownership and continually building upon our operational excellence while adhering to our core purpose. We possess a portfolio of innovative technologies that contribute to the global goals of decarbonizing the grid, developing the hydrogen economy and supporting existing energy and industrial infrastructure investment with a set of differentiated carbon capture solutions. We're working to implement our Powerhouse strategy to strengthen our business, maximize operational efficiencies and position us for long-term growth. We appreciate many of you who track our progress and look for mile markers that illuminate the progress we are making toward the achievement of our Powerhouse business strategy. As I previously stated, we're just 15 months into our Powerhouse strategy and we believe we are on track. The breadth of our portfolio and the ability to apply our technology against a wider set of applications provides FuelCell Energy with greater optionality to shift focus toward our four energy transition focus areas, based on the pace of market adoption, thus increasing diversification. 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. We look forward to the year ahead.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Jeff Osborne, Analyst

Good morning, guys. I was wondering if you could flush out a little bit more detail on the solid oxide electrolysis opportunity that you're testing in Danbury. I wasn't sure what the next steps are. And then how we think about the timeline to commercialization and when you can start participating in RFPs for that fully recognized or some incremental steps that need to be taken from here. But I was just wondering if we could sort of bookend that on how long it will take?

Jason Few, President and Chief Executive Officer

Jeff, great. Good to have you on the call today, and thanks for joining. Great question. Maybe I'll start and then I'll ask Tony Leo, our Chief Technology Officer, to also chime in. So, with this test, we will lead to the next phase of actually executing the test with INL, will be the next phase of our process to get to commercialization. But as we think about the opportunity to your question of participate in RFPs, given where we are and where some of these RFPs, or at least projects that people are talking about are kind of longer dated projects. We will participate in some of those opportunities, if those timelines align with our internal projections about when our product will be commercial. But, Tony, if you have anything else to add to the phases.

Tony Leo, Chief Technology Officer

Yes, I’ll just add, the test we're doing now is with a single stack subscale system, and we’re developing the basic operational approaches, building into the logic of the multi-stack system that we’re building right now later this year. So the stepwise process and we're happy with where we are right now.

Jeff Osborne, Analyst

It's great to hear. Thanks so much.

Laurence Alexander, Analyst

Good morning. Can you characterize the amount that your bidding activity has changed over the last three or six months? And what your kind of bandwidth for new projects is, like what would be kind of the point at which you would say you're stretching your limits?

Jason Few, President and Chief Executive Officer

Laurence, good morning. How are you? Thanks for joining the call this morning. If a bidding activity, if you mean by that the amount of activity we're participating in, in terms of proposals or submitting proposals or responding RFPs, I would say over the last six months has increased fairly significantly for us. I mean, the sales cycle generally, given our megawatt class platforms generally take between 12 to 18 months as a sales cycle. But we've seen a lot of increased activity, not only here domestically, but in the international markets that we're focused on. And so, as I think about it and look at the pipeline, and as we go through our phases in the pipeline from engaging a customer, ultimately to submitting a proposal, I think we're making a lot of progress there. I feel good about the pipeline. And I feel good about the number of opportunities we have in the proposal phase. With respect to the number of projects that we could pursue, if you think about what we do in terms of our carbonate platform as we talked about, and maybe I'll let Mike Lisowski to discuss a little bit in terms of how we're ramping our manufacturing capacity to meet the demand that we see.

Mike Lisowski, Executive Vice President of Operations

So relative to supporting the backlog and future business growth, we are really well-positioned holistically across the business, both from a supply chain perspective and continuity and supply of materials, from a labor and talent position, as well as production capacity. We've been working very hard across our teams, and thoughtfully adding strategic capacity and locations across our factory where they're needed, working to establish enhanced yield, and continue to expand the throughput. So, we're feeling very confident about where we're positioned today, and where we're headed for future business growth.

Jason Few, President and Chief Executive Officer

And I would just add, Laurence, in our factory, we have expandable capacity in our factory. We also have the ability to add additional shifts. So, we feel really good about our ability to meet demand.

Colin Rusch, Analyst

Thanks so much, guys, and well done on hitting the balance sheet and restructure. It sounds like you've got a number of important technology programs underway and partnerships. It looks like you may need to be spending a bit more on R&D. So, wondering if you could talk a little bit about how that spend is expected to trend and the skills that you might need to add to the team?

Jason Few, President and Chief Executive Officer

Yes. Colin, good morning. Thank you. I will ask Mike Bishop to comment on that, with respect to the increased capital that we're putting toward, or support commercialization of these technologies. And, I'll just maybe speak to the skill set, and maybe Tony could add to as well. We feel really good about the technical resources we have on our team across engineering to support our R&D efforts. And that's inclusive of the work that we're doing with respect to carbon capture with EMRE from the Exxon research effort that we have going on.

Mike Bishop, Executive Vice President and Chief Financial Officer

So, when we released our 10-K, we indicated that we anticipate an increase in operational expenses, along with a rise in research and development spending focused on distributed hydrogen and long-duration hydrogen storage. Last year, our R&D expenses were approximately $4.8 million, and this year, we are estimating between $18 million and $20 million in R&D expenses. Additionally, for capital expenditures, which includes acquiring manufacturing and lab equipment, we expect to spend between $5 million and $10 million.

Colin Rusch, Analyst

All right, that's super helpful. And then just as a follow up. As you build up the project pipeline, there's been a tight labor market, we've seen an increase in commodity prices. Can you just talk a little bit about any potential extension on timelines to completing construction? And any sort of CapEx adjustments that you might need to make, given some of those labor and commodity prices?

Jason Few, President and Chief Executive Officer

Colin, we're not seeing any impact from a labor standpoint, relative to the construction side of our in-flight projects. And we're not really forecasting an impact there. It’s something that we continue to monitor. Mike Lisowski is on top of that and manages that very, very tightly. We also aren't seeing any impacts in terms of material supply to the company and our ability to manufacture product in order to meet the demand that we have for in-flight project. So we're not having that experience today as a company.

Jed Dorsheimer, Analyst

Yes, I have a question and a follow-up. Regarding my question about Trigen and the capture process, how should we consider the reduction in efficiency when implementing this additional capture methodology to transition from gray to blue?

Tony Leo, Chief Technology Officer

So, if you think about Trigen, if you count the energy value of hydrogen produced, the efficiency actually goes up, it's quite high. Now if you add, and of course, for our Long Beach project, we're using directed biogas. So, that's zero-carbon to begin with. If you're using natural gas and adding carbon capture, you will obviously have to power that carbon capture equipment to some extent. So, our 2.8-megawatt system in Trigen mode is 2.3 megawatts, you would probably go down to something like 2.1 with carbon capture.

Jed Dorsheimer, Analyst

That's really helpful.

Jason Few, President and Chief Executive Officer

Yes. Jed and Tony, just to clarify that I think what you're powering there is really like compression to liquefy the CO2. It's not a carbon capture equipment, it's the extra equipment you need to liquefy the carbon.

Jed Dorsheimer, Analyst

Great. And just as a follow-up, operationally, I guess, I'm assuming that there's a point in terms of showing the progress and highlighting the Groton sub-base, which seems like it's progressing nicely. So congrats on that. I guess I just want to understand the conversion from backlog into the recognition of those revenues, and kind of that switch into the portfolio. So maybe if you could just, and maybe I missed it, but if you could articulate time expectations in terms of what needs to occur for completion and revenue recognition on that project, that would be helpful. Thanks.

Jason Few, President and Chief Executive Officer

Yes. So, maybe I'll start and then Mike Lisowski and Mike Bishop can chime in. Just in terms of where we are in the process, as I indicated in my remarks, we are materially complete with our portion of the work with the exception of getting the interconnection done, and some other safety work that has to happen. So, we haven't given an exact date, simply because the interconnection agreement, like I indicated its being managed by a third-party. But maybe I'll ask Mike Lisowski to speak to that a little bit.

Mike Lisowski, Executive Vice President of Operations

Jed, thank you for your question. Just to provide a little bit more color around the project, yes, despite some challenges, I'm really, really proud of the team and all the progress that's been realized in reaching our current advanced position in project execution at the Groton site. As Jason has mentioned, all of the site civil construction has been completed, all of the required equipment and materials have been fabricated and delivered to the site. All the mechanical assembly construction is complete at this point, with the majority of the electrical installation completed as well. Right now, we're in the process of discrete equipment checkout and safety-related work as part of the commissioning process. And once we complete that plant commissioning process, we'll be well-positioned to export power once the interconnect is executed and finalized. And as Jason mentioned, that's the point at which you would convert into a revenue-generating asset.

Mike Bishop, Executive Vice President and Chief Financial Officer

And Jed, this is Mike Bishop. I'll add one more point on the revenue side. And as I was trying to highlight in my comments, our generation portfolio is the biggest portion of our revenue backlog. It's about $1.1 billion today. We have approximately 30 megawatts of operating assets. And as we said in our remarks, we're in the process of building out another 40-plus megawatts of assets. So if you think about that operating portfolio, last year, we generated about $20 million of annualized revenue. Well, we're more than doubling the operating portfolio here over the next period of time, as these projects come online, so they'll begin to make meaningful contributions to increasing our generation revenue as they come online.

Jed Dorsheimer, Analyst

Great. That's helpful, guys. Thank you.

Jason Few, President and Chief Executive Officer

Julien, thank you very much. And thank you for joining us today. We will continue to work to execute on our Powerhouse business strategy and 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 empowered by clean energy. And we are committed to delivering long-term shareholder value. Thank you for joining, and have a great day.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.