UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended October 31, 20182019

OR

For the transition period from                     to

Commission file number: 1-14204

FUELCELL ENERGY, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (203) 825-6000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 30, 2018,2019, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $156,140,974$42,440,268 based on the closing sale price of $1.86$3.12 as reported on the NASDAQ Global Market.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

DOCUMENT INCORPORATED BY REFERENCE

FUELCELL ENERGY, INC.

INDEX

PART I

Forward-Looking Statement Disclaimer

This Annual Report on Form 10-K contains statements that the Company believes to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this Form 10-K, including statements regarding the Company’s future financial condition, results of operations, business operations and business prospects, are forward-looking statements.  Words such as “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “believes,” “predicts,” “should,” “will,” “could,” “would,” “may,” “forecast,” and similar expressions and variations of such words are intended to identify forward-looking statements. Such statements relate to, among other things, the following:

The forward-looking statements contained in this report are subject to risks and uncertainties, known and unknown, that could cause actual results to differ materially from those forward-looking statements, including, without limitation, the risks contained under Item 1A - Risk Factors of this report and the following:

We cannot assure you that:

The forward-looking statements contained herein speak only as of the date of this report and readers are cautioned not to place undue reliance on these forward-looking statements. Except for ongoing obligations to disclose material information under the federal securities laws, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any such statement to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based.

Background

Information contained in this report concerning the electric power supply industry and the distributed generation market, our general expectations concerning this industry and this market, and our position within this industry are based on market research, industry publications, other publicly available information and assumptions made by us based on this information and our knowledge of this industry and this market, which we believe to be reasonable.  Although we believe that the market research, industry publications and other publicly available information, including the sources that we cite in this report, are reliable, they have not been independently verified by us and, accordingly, we cannot assure you that such information is accurate in all material respects.  Our estimates, particularly as they relate to our general expectations concerning the electric power supply industry and the distributed generation market, involve risks and uncertainties and are subject to change based on various factors, including those discussed under Item 1A - Risk Factors of this report.

As used in this report, all degrees refer to Fahrenheit (“F”); kilowatt (“kW”) and megawatt (“MW”) numbers designate nominal or rated capacity of the referenced power plant; “efficiency” or “electrical efficiency” means the ratio of the electrical energy generated in the conversion of a fuel to the total energy contained in the fuel (lower heating value, the standard for power plant generation, assumes the water in the product is in vapor form; as opposed to higher

heating value, which assumes the water in the product is in liquid form, net of parasitic load); kW means 1,000 watts; MW means 1,000,000 watts; “kilowatt hour” (“kWh”) is equal to 1kW of power supplied to or taken from an electric circuit steadily for one hour; and one British Thermal Unit (“Btu”) is equal to the amount of heat necessary to raise one pound of pure water from 59^oF to 60^oF at a specified constant pressure.

All dollar amounts are in U.S. dollars unless otherwise noted.

Additional Technical Terms and Definitions

Advanced Technologies - Advanced Technologies projects involve the development of new products or applications based on existing carbonate technologyor solid oxide technologies or new electrochemical technologies.  Examples are carbon capture, distributed hydrogen, solid oxide fuel cells and solid oxide electrolysis cell technologies.  Advanced Technologies projects are typically externally funded by government or private sources and executed by our Advanced Technologies Group.

Availability - A measure of the amount of time a system is available to operate, as a fraction of total calendar time.  For power generation equipment, an industry standard (IEEE (The Institute of Electrical and Electronics Engineers) 762, “Definitions for Use in Reporting Electric Generating Unit Reliability, Availability and Productivity”) is used to compute availability. “Availability percentage” is calculated as total period hours since Commercial Operations Date less hours not producing electricity due to planned and unplanned maintenance divided by total period hours. Grid disturbances, force majeure events and site specific issues such as a lack of available fuel supply or customer infrastructure repair do not penalize the calculation of availability according to this standard.

Carbonate Fuel Cell (“CFC”) - Carbonate fuel cells, such as the fuel cell power plants produced and sold by FuelCell Energy, are high-temperature fuel cells that use an electrolyte composed of a carbonate salt mixture suspended in a porous, chemically inert ceramic-based matrix. CFCs operate at high temperatures, enabling the use of a nickel-based catalyst, a lower cost alternative to precious metal catalysts used in some other fuel cell technologies.

Combined Heat & Power (“CHP”) - A power plant configuration or mode of operation featuring simultaneous on-site generation from the same unit of fuel of both electricity and heat with the heat used to produce steam, hot water or heated air for both heating and cooling applications.

Commercial Operations Date (“COD”) - The date that testing and commissioning of a fuel cell project is completed and the fuel cell power plant is operational with power being generated and sold to the end-user.

Distributed Generation - Electric power that is generated where it is needed (distributed throughout the power grid) rather than from a central location. Centrally generated power requires extensive transmission networks that require maintenance and experience efficiency losses during transmission while distributed generation does not.  Distributed generation is typically classified as small to mid-size power plants, typically generating 75 MW or less.  Central generation is typically classified as large power plants generating hundreds or even thousands of MW.

Micro-gridsMicrogrids - Micro-gridsMicrogrids are localized electric grids that can disconnect from the traditional electric grid to operate autonomously and strengthen grid resiliency.  Micro-gridsMicrogrids can be composed only of SureSource power plants due to their continual power output or combine a variety of power generation types such as fuel cells and solar arrays.

Nitrogen Oxides (“NOx”) - Generic term for a group of highly reactive gases, all of which contain nitrogen and oxygen in varying amounts. Many of the NOx are colorless and odorless; however, they are a major precursor to smog production and acid rain. One common pollutant, Nitrogen Dioxide, along with particles in the air, can often be seen as a reddish-brown layer over manyan urban areas.area. NOx form when fuel is burned at high temperatures, as in a combustion process. The primary manmade sources of NOx are motor vehicles, traditional fossil-fuelfossil fuel fired electric utility generation, and other industrial, commercial and residential sources that burn fuels.

Particulate Matter(“PM”) - Solid or liquid particles emitted into the air that are generally caused by the combustion of materials or dust generating activities. Particulate matter caused by combustion can be harmful to humans as the fine particles of chemicals, acids and metals may get lodged in lung tissue.

Power Purchase Agreement (“PPA”) - A Power Purchase Agreement is a contract that enables a power user to purchase energy under a long-term contract where the user agrees to pay a predetermined rate for the kilowatt-hours delivered from a power generating asset while avoiding the need to own the equipment and pay the upfront capital cost.  The PPA rate is typically fixed (with an escalation clause tied to a consumer price index or similar index), or pegged to a floating index that is on par with or below the current electricity rate being charged by the local utility company, andcompany. A PPA is typically for a term of 10 to 20 years.

Renewable Biogas or Biogas - Renewable biogasBiogas is fuel produced by biological breakdown of organic material.  Biogas is commonly produced in biomass digesters employing bacteria in a heated and controlled oxygen environment.  These digesters are typically used at wastewater treatment facilities or food processors to break down solid waste and the biogas produced is a byproduct of the waste digestion. Biogas can be used as a renewable fuel source for SureSource fuel cell plants located on site where the biogas is produced with gas cleanup, or it can be processed further to meet pipeline fuel standards and injected into a gas pipeline network, which is termed Directed Biogas.  Directed Biogas requires additional processing to increase the Btu content of the gas, which increases cost and consumes power.  Use of Biogas at the point of production (on-site) is more efficient and more economical.  

Solid Oxide Electrolysis Cell (“SOEC”) - Solid Oxide Electrolysis Cells are electrochemical cells with the same cell and stack structure as Solid Oxide Fuel Cells, but are operated in reverse – instead of producing power from fuel and oxygen, SOEC cells produce hydrogen and oxygen from steam when supplied with power. The Solid Oxide Fuel Cell platform can be operated in fuel cell mode (producing power from fuel) or electrolysis mode (producing hydrogen from power) and can alternate between the two.

Solid Oxide Fuel Cell (“SOFC”) - Solid Oxide Fuel Cells are electrochemical cells with a non-porous ceramic material as the electrolyte. SOFCs operate at high temperatures (slightly higher than carbonate fuel cells) eliminating the need for costly precious-metal catalysts, thereby reducing cost. Like carbonate fuel cells, the high operating temperature enables internal reforming of the hydrogen rich fuel source. The Solid Oxide Fuel Cell platform can be operated in fuel cell mode (producing power from fuel) or electrolysis mode (producing hydrogen from power) and can alternate between the two.

Sulfur Oxide (“SOx”) - Sulfur oxide refers to any one of the following: sulfur monoxide, sulfur dioxide (“SO₂”) and sulfur trioxide. SO₂ is a byproduct of various industrial processes. Coal and petroleum contain sulfur compounds, and generate SO₂ when burned.  SOx compounds are particulate and acid rain precursors.

Overview

FuelCell Energy, based in Connecticut, was founded in 1969 as a New York corporation to provide applied research and development services on a contract basis. We completed our initial public offering in 1992 and reincorporated in Delaware in 1999.  We began selling stationary fuel cell power plants commercially in 2003.

With more than 9.5 million megawatt hours of clean electricity produced, FuelCell Energy is now a global leader in delivering environmentally-responsible distributed baseload power solutions through our proprietary, molten-carbonate fuel cell technology. Today, we develop turn-key distributed power generation solutions and operate and provide comprehensive service for the life of the power plant. We are working to expand the proprietary technologies that we have developed over the past five decades into new products, markets and geographies.

Fiscal year 2019 was one of transformation for FuelCell Energy. We restructured our management team and our operations in ways that are intended to support our growth and achieve our profitability and sustainability goals. We raised capital under our at-the-market sales plan, which allowed us to pay down our accounts payable and stay current on our forbearance agreements.  We repaid a substantial portion of our short-term debt, retired our Series C and Series D Convertible Preferred Stock obligations, and refocused on our core competencies in an effort to drive top-line revenue. We believe we have emerged from a difficult fiscal 2019 as a stronger company, better positioned to execute on our business plan. Our recent achievements, accomplished during one of the most stressful times in the Company’s history, include: (a) closing on a new $200 million credit facility with Orion Energy Partners Investment Agent, LLC and certain of its affiliated lenders (“Orion Energy Partners”), (b) executing a new Joint Development Agreement with ExxonMobil Research and Engineering Company (“EMRE”), with anticipated revenues of up to $60 million, (c)

restructuring our business to realize annualized operating savings of approximately $15 million, (d) making progress in constructing certain projects in our backlog, including the Connecticut Municipal Electric Energy Cooperative (“CMEEC”) project at the U.S. Navy base in Groton, Connecticut and the commissioning and startup of the 2.8 MW Tulare BioMAT project in California, (e) relaunching our sub-megawatt product in Europe, (f) executing a strategic relationship with E.On Business Solutions, an affiliate of one of the largest utilities in the world, to market and distribute our products beyond the two FuelCell operating plants E.On already owns, (g) extending the maturity of the Class A Cumulative Redeemable Exchangeable Preferred Shares issued by FCE FuelCell Energy Ltd. (the “Series 1 Preferred Shares”) by one year, and (h) concluding our engagement with Huron Consulting Services, LLC (“Huron Consulting”) after successful restructuring and payoff of our prior senior secured credit facility.

We will use this new focus coming out of our restructuring to advance our core goals of:

In order to achieve our core goals, we will focus in 2020 on implementing our new “Powerhouse” business strategy to strengthen our business, maximize operational efficiencies and position us for future growth. The “Powerhouse” business strategy is focused on three fundamental pillars – Transform, Strengthen, Grow – which are described in further detail below.

Transform

We spent the latter half of fiscal 2019 working on and achieving the following:

Strengthen

Grow

Our mission and purpose isremains to utilize our proprietary, state-of-the-art fuel cell power plants to providereduce the global environmental footprint of baseload power generation by providing environmentally responsible solutions for variousreliable electrical power, hot water, steam, chilling, hydrogen, microgrid applications, and carbon capture and, in so doing, drive demand for our products and services, thus realizing positive stockholder returns.

Our fuel cell solution is a clean, efficient alternative to traditional combustion-based power generation and is complementary to an energy mix consisting of intermittent sources of energy, such as utility-scalesolar and on-site power generation, carbon capture, local hydrogen production for both transportation and industry, and long duration energy storage.wind turbines.  Our systems cater toanswer the needs of diverse customers across several industries,markets, including utility companies, municipalities, universities, hospitals, government entities and a variety of industrial and commercial enterprises.  WithWe provide solutions for various applications, including utility-scale distributed generation, on-site power generation and combined heat and power, with the differentiating ability to do so utilizing multiple sources of fuel including natural gas, Renewable Biogas (i.e., landfill gas, anaerobic digester gas), propane and various blends of such fuels. Our multi-fuel source capability is significantly enhanced by our proprietary gas-clean-up skid.

Products

Our core fuel cell products offer clean, highly efficient and affordable power generation for customers, including the sub-megawatt SureSource 250^TM and SureSource 400^TM in Europe, and the 1.4 MW SureSource 1500^TM, the 2.8 MW SureSource 3000^TM, and the 3.7 MW SureSource 4000^TM globally.  The plants are scalable for multi-megawatt utility applications, microgrid applications, distributed hydrogen, or on-site CHP generation for a broad range of applications.  

The global SureSource product line is uniformly based on the same carbonate fuel cell technology.  Using a standard design globally enables supply chain volume-based cost reduction, optimal resource utilization and long-life product enhancements.  Our power plants utilize a variety of available fuels to produce electricity electrochemically, in a process that is highly efficient, quiet, and produces virtually none of the particulate pollutants associated with traditional combustion-based power generation solutions. In addition to electricity, our standard fuel cell configuration produces high quality thermal energy (approximately 700° F), suitable for heating facilities or water, or steam for industrial processes or for absorption cooling.  When configured for CHP, our system efficiencies can potentially reach up to 90%, depending on the application.  When configured for distributed hydrogen our plants produce hydrogen in addition to power, with an effective efficiency (counting the fuel that would have been used to produce hydrogen conventionally) of up to 80% before considering waste heat utilization, which can raise the total efficiency even higher.

Our proprietary carbonate fuel cell technology generates electricity directly from a fuel, such as natural gas or Renewable Biogas, by reforming the fuel inside the fuel cell to produce hydrogen. This internal, proprietary “one-step” reforming process results in a simpler, more efficient, and cost-effective energy conversion system compared with external reforming fuel cells.  Additionally, natural gas has an established infrastructure and is readily available in our existing and target markets compared to some types of fuel cells that can only operate on high purity hydrogen, and Biogas is rapidly growing in production around the world. Our products are fuel flexible, and mainly utilize clean natural gas and Renewable Biogas generated by the customer on-site or directed Biogas generated at a distant location and transported via the existing common carrier gas pipeline networks. The unique chemistry of our Carbonate Fuel Cells allows them to directly use low Btu on-site Biogas with no reduction in output or efficiency compared to

operation on natural gas.  We have developed proprietary Biogas cleanup and contaminant monitoring equipment which, combined with the inherent suitability of the Carbonate Fuel Cell chemistry, gives us an advantage in on-site Biogas applications.  Our SureSource 1500 and SureSource 3000 power plants are the only systems certified to California Air Resource Board (“CARB”) emissions standards under the Distributed Generation Certification Program for operation with on-site Biogas. In addition, we have demonstrated operation of our carbonate fuel cell technology with other fuel sources including coal syngas and propane.

Our fuel cells operate at approximately 1,100° F. A key advantage of high temperature fuel cells is that they do not require the use of precious metal electrodes required by lower temperature fuel cells, such as proton-exchange membrane (“PEM”) fuel cells.  As a result, we are able to use less expensive and readily available industrial metals, primarily nickel and stainless steel, as catalysts for our fuel cell components. Another key advantage of our fuel cell design is that they are easily sited with a relatively small footprint given the amount of power produced. There is minimal noise produced by the mechanical balance of plant (“BOP”) and a clean emissions profile, making our fuel cells ideally suited for urban and in building suburban applications at or near the point of energy consumption.

We market different configurations and applications of our SureSource plants to meet specific market needs, including:

In summary, our solutions offer many advantages:

Advanced Technologies Programs

Our Advanced Technologies programs, including our carbon capture, local hydrogen production and solid oxide fuel cells and electrolysis for energy storage represent future market, product and revenue opportunities for the Company beyond our current product line. We undertake both privately-funded and public research and development to develop these opportunities, reduce costs, and expand our technology portfolio.

Our multi-featured power plant platforms can be configured to provide a number of value streams, including clean electricity, high quality usable heat, and hydrogen suitable for vehicle fueling, industrial purposes or power generation, and to concentrate CO₂ from coal, biomass and natural gas fired power plants and industrial applications.  

We have historically worked on technology development with various U.S. government departments and agencies, including the Department of Energy (“DOE”), the Department of Defense (“DOD”), the Environmental Protection Agency (“EPA”), the Defense Advanced Research Projects Agency (“DARPA”), the Office of Naval Research (“ONR”), and the National Aeronautics and Space Administration (“NASA”). Government funding, principally from the DOE, provided 6%, 8% and 9% of our revenue for the fiscal years ended October 31, 2019, 2018, and 2017, respectively.

Our Advanced Technologies programs are currently focused on commercializing solutions within three strategic areas:

Carbon Capture – Power generation and industrial applications are the source of two-thirds of the world’s carbon emissions. Coal and natural gas are abundant, low-cost resources that are widely used to generate electricity in developed and developing countries, but burning these fuels, as well as burning biomass, results in the emission of criteria pollutants and CO₂. Cost effective and efficient carbon capture from power generation and industrial applications globally represents a large market because it could enable clean use of all available fuels. The SureSource Capture^TM system separates and concentrates CO₂ from the flue gases of natural gas, biomass or coal-fired power plants or industrial facilities as a side reaction that extracts and purifies the CO₂ in the flue gas during the power generation process and destroys approximately 70% of NOx emissions. The production of additional power during the capture process, as opposed to consuming power, differentiates the SureSource Capture system from all other forms of carbon capture. This could make the SureSource Capture system more cost effective than 8.0 million megawatt hoursother systems which are being considered for carbon capture. SureSource Capture systems can be implemented in increments, managing capital outlay to match decarbonization objectives and regulatory requirements.  Since our solution generates a return on capital resulting from the fuel cell's production of ultra-cleanelectricity rather than an increase in operating expense required by other carbon capture technologies, it can extend the life of existing power plants. We have a joint development agreement with EMRE to develop and commercialize this application of our core technology. See additional discussion concerning our relationship with EMRE under the section below entitled “License Agreements and Royalty Income”. We are also working on a carbon capture project with Drax Power Station, the largest single-site renewable power generator in the United Kingdom.

Distributed Hydrogen Production, Compression, and Recovery - On-site or distributed hydrogen generation, produced FuelCell Energycleanly, represents an attractive and expansive market.  Our high temperature fuel cells generate electricity directly from a fuel by reforming the fuel inside the fuel cell to supply hydrogen for the electrical generation process.  We have developed a process by which gas separation technology can be added to our core fuel cell to capture hydrogen that is not used by the electrical generation process, and we refer to this configuration as SureSource Hydrogen. The SureSource Hydrogen product has the potential to be a compelling solution for industrial users of hydrogen and in transportation fueling applications. The 2.3 MW SureSource Hydrogen plant has a hydrogen output of approximately 1,200 kg per day, in addition to the electricity, thermal energy and water generated by the fuel cell. Hydrogen is typically made from natural gas in large central steam methane reforming (“SMR”) plants. The conventional reforming process involves burning fossil fuel to produce steam and to heat a fuel/steam mixture to a high temperature, which is then passed over a catalyst that converts the methane/water mixture to carbon dioxide and hydrogen.  The need to burn fossil fuel to provide thermal energy produces additional carbon dioxide criteria pollutant emissions, and SMRs are significant water consumers.  A similar, but environmentally sustainable, process happens in SureSource internal reforming: methane (from natural gas or Biogas) reacts with water to produce hydrogen, but, in the internal reforming process, the water and the heat are byproducts of the fuel cell reaction.  There is no need to burn fuel to supply heat, and there is no need to supply water.  In fact, a SureSource Hydrogen plant is a global leader in designing, manufacturing, installing, operatingnet water producer, not a water consumer.  When operated on Biogas, SureSource Hydrogen systems produce renewable hydrogen, but, even when fueled with natural gas, they produce hydrogen with a lower carbon impact than conventional SMR because of the use of internal heat instead of burning fuel.

SOFC/SOEC and maintaining environmentally responsibleEnergy Storage – We are developing a solution for long duration energy storage using our proprietary solid oxide technology.  Our solid oxide stacks are capable of alternating between electrolysis and power generation mode.  Instead of producing power from fuel and air, a solid oxide fuel cell distributedstack in electrolysis mode splits water into hydrogen and oxygen using supplied electricity.  A storage system based on SOFC/SOEC technology will start with stored water, which will be converted to hydrogen during charging by electrolysis in the solid oxide stacks.  The hydrogen is stored as compressed gas in cylinders or underground, creating the ability to produce a virtually limitless supply.  When discharge power solutions.is needed, the stored hydrogen is sent back to the solid oxide stacks, which react it with air to produce power and to regenerate the water, which is stored for the next cycle.

The key aspect of this approach is that the reactant (water) is inexpensive and plentiful.  Long duration storage can be achieved by adding water and hydrogen storage capacity, without the need to add excessive amounts of conventional battery reactants (e.g. Lithium, Cobalt, etc.), which have supply constraints for broad adoption and which present disposal challenges.  Long duration energy storage is going to be required at large scale during time periods ranging from hourly to seasonal in order to manage high penetration of intermittent renewable resources, and this

water/hydrogen based approach of our SOFC/SOEC technology has the potential to be the key enabler of long duration storage.

SOFC power plant design and manufacturing is complementary to our carbonate-based megawatt-scale product line and affords us the opportunity to leverage our field operating history, our existing expertise in power plant design, fuel processing and high volume manufacturing capabilities, and our existing installation and service infrastructure.  Additionally, the target market for storage applications is electric utilities, which is a market in which we are already active.  

We provide comprehensive turn-keyperform SOFC/SOEC research and development at our Danbury, Connecticut headquarters, as well as at our dedicated SOFC/SOEC facility in Calgary, Alberta, Canada.  We are working under a variety of awards from the DOE for development and commercialization of both SOFC and SOEC, and, during fiscal year 2019, we advanced our solid oxide power generation, electrolysis and energy storage applications by executing on our existing DOE contracts.  Our solid oxide development activities are focused on three applications:  power generation, electrolysis, and energy storage (which is a combination of the first two).  During fiscal year 2019, we conducted our first prototype field test of a 250kW natural gas fueled SOFC power plant at the Clearway Energy Center in downtown Pittsburgh, Pennsylvania.  We are currently fabricating an advanced electrolysis system for testing in our Danbury, Connecticut headquarters, and we were recently awarded funding from the DOE to convert the electrolysis system to a reversible storage facility after the electrolysis testing is complete in late 2020.  We believe that energy storage based on reversible solid oxide stacks can be a game changer for long duration energy storage.  

We believe there are significant market opportunities for distributed hydrogen production, carbon capture, solid oxide fuel cell solutions and energy storage that represent potential future revenue opportunities for the Company. The projects described above allow us to leverage third-party resources and funding to accelerate the commercialization and realize the market potential of each of these solutions and virtually eliminate the need to rely on and use rare earth minerals.

SureSource Emissions Profile

Fuel cells are non-combustion devices that directly convert chemical energy (fuel) into electricity, heat and water.  Because fuel cells generate power electrochemically rather than by combusting (burning) fuels, they are more efficient in extracting energy from fuels and produce less CO₂ and only trace levels of pollutants compared to combustion-type power generation or traditional power sources used to firm-up intermittent power sources, such as wind and solar.  The following table illustrates the favorable emission profile of our customers,SureSource power plants:

The high efficiency of our products results in significantly less CO₂ per unit of power production compared to the average U.S. fossil fuel power plant, and the carbon emissions are reduced even further when configured for CHP applications or biofuels.  When our power plants are operating on Renewable Biogas, government agencies and regulatory bodies generally classify them as carbon neutral due to the renewable nature of the fuel source. The low CO₂ emissions and low criteria pollutants from SureSource power plants have a significant impact on sustainability and air quality because they avoid emissions 24 hours a day.  The high capacity factor of baseload SureSource systems maximizes the impact of their environmental benefits.  The following table shows how the low emissions combined with high capacity factor result in emissions avoidance comparable to or better than intermittent renewable power sources.  While wind and solar renewable power sources may completely avoid these emissions while operating, given their low capacity factors, they avoid fewer emissions than fuel cells only because they operate for fewer hours per day. When wind and solar renewable power sources are not operating, higher emission resources are required to operate, thus diluting the benefits. Additionally, all renewable power sources have life cycle emissions associated with manufacture and disposal.

Business Strategy

Our business model is based on multiple revenue streams, including power plant and component sales; recurring service revenue, mainly through long-term service agreements; recurring electricity, capacity and renewable attribute sales under PPAs and tariffs for projects we retain in our generation portfolio; and revenue from public and private industry research contracts under Advanced Technologies.

We are a complete solutions provider, controlling the design, manufacturing, sales, installation, operations and maintenance of our patented fuel cell technology under multi-yearlong-term power purchase and service agreements. When principally utilizing long-term PPAs, the end-user of the power or utility hosts the installation and only pays for power as it is delivered, avoiding up-front capital investment. We bothalso develop projects as well asand sell equipment directly to customers, providing either a complete solution of engineering, installing and servicing the fuel cell power plant or selling the power plant equipmentunder an engineering, procurement and providingconstruction (“EPC”) agreement and a long-term maintenance only.  We offer to arrange financing structures that enable power users to benefit fromand service agreement.  In all cases, FuelCell Energy maintains the multitude of advantages of clean onsite power while avoiding an up-front capital investment. Utilizing long-term power purchase agreements (PPAs) or lease structures,recurring service obligation and associated revenues running conterminous with the end-userlife of the power hosts the installation and only pays for power as it is delivered. For projects that we develop, the end user of the power typically enters into a PPA, and we have the option to either identify a project investor to purchase the power plant and assume the PPA, or retain the project and recognize electricity revenue ratably over the term of the PPA.  project.

We target large-scale power users with our megawatt-class installations.installations globally, and currently offer sub-megawatt solutions for smaller power consumers in Europe.  To provide a frame of reference, one megawatt is adequate to continually power approximately 1,000 average sized U.S. homes.  Our customer base includes utility companies, municipalities, universities, hospitals, government entities and a variety of industrial and commercial enterprises. Our leading geographic markets aremarket is currently the United States, and South Korea, and we are pursuing expanding opportunities in other countries around the world.

Our value proposition is to enable economic returns with clean, affordable, reliable and resilient fuel cell power plants that supply power where consumed. Our products can also be configured for carbon capture, energy recovery and storage applications.  Our solutions are easy-to-site in populated areas as they are clean, operate quietly and without vibrations, and have only modest space requirements.  Fuel cells use an electrochemical process to convert a fuel source into electricity and heat in a highly efficient process that emits virtually no pollutants as the fuel is not burned, generating power that is almost wholly absent of criteria pollutants such as NOx that causes smog, SOx that contributes to acid rain, and particulate matter that can aggravate asthma.  Locating power generation near the point of use reduces reliance on the transmission grid, leading to enhanced energy security and power reliability.  Utilities can minimize or even avoid the cost of transmission or other infrastructure by adopting distributed generation, which saves their customers the cost of installing and maintaining transmission and also avoids the losses associated with transmitting electricity over great distances.  Our power plants provide electricity priced competitively to grid-delivered electricity in certain high cost regions, and our strategy is to continue to reduce costs, which we believe will lead to wider adoption.

FuelCell Energy was founded as a New York corporation headquartered in Connecticut in 1969 as an applied research organization, providing contract research and development.  The Company went public in 1992 and reincorporated in Delaware in 1999.  We began selling stationary fuel cell power plants commercially in 2003.  Today, we develop turn-key distributed power generation solutions, operating and providing comprehensive service for the life of the power plant.

Business Strategy

Central to our overall business strategy are four main areas of focus: (1) executing on our backlog and new project awards, (2) growing our generation portfolio, (3) competing for and winning new business around the world, and (4) developing and commercializing our carbon capture, distributed hydrogen and long duration energy storage solutions. We plan to continue to grow our generation portfolio in an effort to drive additional recurring revenue and profitability to complement our project sale model. We also intend to expand our domestic U.S. presence with our “Energy as a Service” model, under which we deliver energy to the customer under a PPA, as there are signs of acceleration of the adoption of distributed generation fuel cells owned by utilities in the U.S. under this model.  Lastly, the products under development in our Advanced Technologies group have great market potential, and we expect to commercially deploy these products over the next several years.

Our business model involves full life-cycle management of our projects and fuel cell solutions, from design through operation and maintenance. Our solutions employ a common core fuel cell technology, allowing our common product design to target global marketsmaintenance, including on-siteremoval and utility-scale projects forrecycling. By weight, approximately 93% of the supply, recovery and storageentire power plant can be re-used or recycled at the end of energy.  We selectively utilize strategic business alliances and collaboration agreements for market development, financing and cost reductions.  its useful life.

Our extensive intellectual property portfolio consists of patents, trade secrets and collective experience, which acts as a foundation for expanding and maximizing our solutions portfolio.  Our business model is based on multiple revenue streams, including power plant and component sales; engineering, procurement and construction (“EPC”) revenue; royalty and license revenue; recurring service revenue, including long-term service agreements; recurring electricity sales under PPAs and tariffs for projects we retain in our generation portfolio; and revenue from public and private industry research contracts under Advanced Technologies.  

Market Adoption

We target vertical markets and geographic regions that value clean distributed generation, are located where there are high energy costs, and are aligned with regulatory frameworks that harmonize energy, economic and environmental policies.  that:

Our business model addresses all three offocuses on providing these policy areasvertical markets and geographic regions with highly efficient and affordable distributed generation that delivers de-centralized power in a low-carbon, virtually pollutant-free manner. Geographic markets that meet these criteria and where we are already well established include South Korea, the Northeast U.S.Northeastern United States and California.  We have also installed and operatedare operating plants in Europe and Asia, mainly South Korea, in addition to North America. We selectively develop strategic business relationships with some of the leading energy and power generation companies in our target markets to facilitate demand and deploy our projects. While the

The Company has made significant progress with reducing costs and creating markets since the commercialization of our products in 2003, with more than 255 MW of our SureSource technology currently installed and operating. We believe that we face two primary challenges in growingcan accelerate and expand the adoption of our distributed power generation solutions.  These aresolutions through (1) the need to further

reduce reductions in the total cost of ownership, and (2) the continued education and acknowledgment ofregarding the value that our solutions provide.  The business modelprovide, (3) geographic and segment expansion, (4) growing demand for theonsite generation, (5) microgrid expansion, and delivery of electricity for over a century has been central generation, which is large-scale power generation in distant locations away from urban areas with transmission(6) product expansion across biofuels, carbon capture and distribution to the end users.  Distributed generation enhances existing utility models and it is being embraced in an increasing number of markets to improve grid operations.local hydrogen.  

We work with utilities and power generators to demonstrate how our solutions complement central generation by incrementally adding clean power generation when and where needed.  One example of this is a 40 megawatt fuel-cell only solicitation by Long Island Power Authority (“LIPA”) to address load pockets or power needs in specific areas of its service territory.  LIPA operates in an area with high population density, scarce and expensive land, the need for resiliency to ensure power during storms, and vocal citizens that may not welcome new transmission lines in their neighborhoods.  The structure of the program reflected the unique value drivers of fuel cells to cleanly, efficiently and economically supply power where it is needed, which for LIPA is near existing electrical substations.  LIPA awarded the entire 40 MW solicitation to FuelCell Energy through a competitive bidding process after a review of more than 375 MW of proposals from multiple developers.  

Fuel Cell Power Plant Ownership Structures

InHistorically, in the United States, historically customers or developers generallytypically purchased our fuel cell power plants outright.  As the size of our fuel cell projects has grown and the availability of project capital has improved, project structures in the U.S. have transitioned to predominantly PPAs, which is what we refer to as the “Energy as a Service” model.PPAs.  Under a PPA, the utility or end-user of the power commits to purchase power as it is produced for an extended period of time, typically 10 to 2010-to-20 years.  Examples of actual end-userscustomers that have previously entered into PPAs include universities, a pharmaceutical company, hospitals and utilities.  A primary advantage for the end-usercustomer is that it does not need to commit its own capital or own a power generating asset, yet it enjoys the multiple benefits of fuel cell power generation.

Once the PPA is executed and project financing is committed, construction of the fuel cell project can begin.  At or around COD,the Commercial Operation Date, the project may be sold to a project investor or retained by the Company.  If the project is sold, revenue from the product sale is recognized.recognized, and the Company recognizes revenue separately for the long-term maintenance and service agreement over the term of that agreement.  If the project is retained, electricity, salescapacity and/or renewable energy credits are recognized monthly over the term of the PPA. We report the financial performance of retained projects as generation revenue and income.

Our decision to retain certain projects is based in part on the recurring, predictable cash flows these projects can offer to us, the proliferation of power purchase agreementsPPAs in the industry and the potential access to capital.  Retaining PPAs affords the Company the full benefit of future cash flows under the PPAs, which are higher than if we sell the projects.projects, although it requires more upfront capital investment and financing.  As of October 31, 2018,2019, our operating portfolio of retained projects totaled 11.226.1 MW with an additional 83.179.5 MW under development or construction.  The Company plans to continue to grow this portfolio in a balanced manner, while also selling projects to investors when thatselling presents the best value and opportunity for the Company’s capital. In furtherance ofcapital or meets the assetcustomer’s desired ownership “Energy as a Service” model, the Company, through its subsidiary FuelCell Energy Finance, LLC, on October 31, 2018, signed a Membership Interest Purchase Agreement with Dominion Generation, Inc. (“Dominion”) to reacquire the 15 MW Bridgeport fuel cell park project. The Company is currently working to arrange financing to close the transaction with Dominion.structure.

Levelized Cost of Energy

Our fuel cell projects deliver power at a rate comparable to pricing from the grid in our targeted markets.  Policy programs that help to support adoption of clean distributed power generation often lead to below-grid pricing.  We measure power costs by calculating the Levelized Cost of Energy (“LCOE”) over the life of the project.  

There are several primary elements to LCOE for our fuel cell projects, including (1) capital cost, (2) operations and maintenance, (3) fuel, and (4) cost of capital.  including:

Given the level of integration in our business model of manufacturing, installing and operating fuel cell power plants, there are multiple areas and opportunities for cost reductions. We are actively managing and reducing costs in all fourthree LCOE areas as follows:

An additionalimportant and differentiating factor that benefits fuel cells when comparing LCOE to other forms of power generation is that our solutions provide delivered electricity that minimizes or even avoids the costs of high voltage and distributed transmission.

Energy can be produced right at the point of use. When comparing LCOE across different forms of power generation, transmission needs toshould be considered in the evaluation.considered.  Power generation far from where the power is used requires transmission, which is a cost to ratepayers,

creates risk of system outages, increases cyber attack risk, and is inefficient due to line losses of power in the transmission process. TransmissionRecent events, including hurricanes along the Gulf

coast and Puerto Rico, wildfires in California, and significant snow and ice storms in the Northeastern U.S., prove that transmission systems are also more vulnerable to storm-related and other interruptions than locally-generated energy.

We believe that ourRecently, California was affected by the utility policy of Public Safety Power Shutoffs (“PSPS”), a preemptive effort by the utility companies to prevent wildfires from being started by electrical equipment during strong business model and strategy, demonstrated projectdry wind conditions. Two plants manufactured and operated by FuelCell Energy remained operational as part of their respective microgrids in areas impacted by PSPS and provided steady, reliable power to the University of California, San Diego and the Santa Rita Jail during a time when over 3 million people were generally affected by PSPS.

Producing power near the point of use also facilitates the development and execution, plant operating performance, and strategic relationships will support accelerated adoption of ourCHP applications, since it is easier to find a user for fuel cell solutions.waste heat in distributed applications.  Using waste heat to avoid burning fuel for thermal applications reduces LCOE (by avoiding fuel cost) and avoids additional carbon emissions and criteria pollutants.

Markets

Vertical MarketsSureSource Emissions Profile

AccessFuel cells are non-combustion devices that directly convert chemical energy (fuel) into electricity, heat and water.  Because fuel cells generate power electrochemically rather than by combusting (burning) fuels, they are more efficient in extracting energy from fuels and produce less CO₂ and only trace levels of pollutants compared to clean, affordablecombustion-type power generation or traditional power sources used to firm-up intermittent power sources, such as wind and reliablesolar.  The following table illustrates the favorable emission profile of our SureSource power defines modern lifestyles.  plants:

The abilityhigh efficiency of our products results in significantly less CO₂ per unit of power production compared to providethe average U.S. fossil fuel power cleanlyplant, and efficiently is takingthe carbon emissions are reduced even further when configured for CHP applications or biofuels.  When our power plants are operating on greater importanceRenewable Biogas, government agencies and urgency in many regionsregulatory bodies generally classify them as carbon neutral due to the renewable nature of the world.  Central generationfuel source. The low CO₂ emissions and its associated transmission and distribution grid are difficult to site, costly, prone to interruption and generally take many years to permit and build.  Some types of power generation that were widely adopted in the past, such as nuclear power, are no longer welcome in certain regions.  The cost and impact to public health and the environment oflow criteria pollutants and greenhouse gas emissions impact the siting of new power generation.  The attributes offrom SureSource power plants addresshave a significant impact on sustainability and air quality because they avoid emissions 24 hours a day.  The high capacity factor of baseload SureSource systems maximizes the impact of their environmental benefits.  The following table shows how the low emissions combined with high capacity factor result in emissions avoidance comparable to or better than intermittent renewable power sources.  While wind and solar renewable power sources may completely avoid these challenges byemissions while operating, given their low capacity factors, they avoid fewer emissions than fuel cells only because they operate for fewer hours per day. When wind and solar renewable power sources are not operating, higher emission resources are required to operate, thus diluting the benefits. Additionally, all renewable power sources have life cycle emissions associated with manufacture and disposal.

Business Strategy

Our business model is based on multiple revenue streams, including power plant and component sales; recurring service revenue, mainly through long-term service agreements; recurring electricity, capacity and renewable attribute sales under PPAs and tariffs for projects we retain in our generation portfolio; and revenue from public and private industry research contracts under Advanced Technologies.

We are a complete solutions provider, controlling the design, manufacturing, sales, installation, operations and maintenance of our patented fuel cell technology under long-term power purchase and service agreements. When principally utilizing long-term PPAs, the end-user of the power or utility hosts the installation and only pays for power as it is delivered, avoiding up-front capital investment. We also develop projects and sell equipment directly to customers, providing virtually particulate emission-freea complete solution of engineering, installing and servicing the fuel cell power plant under an engineering, procurement and where desired, thermal energyconstruction (“EPC”) agreement and a long-term maintenance and service agreement.  In all cases, FuelCell Energy maintains the long-term recurring service obligation and associated revenues running conterminous with the life of the project.

We target large-scale power users with our megawatt-class installations globally, and currently offer sub-megawatt solutions for smaller power consumers in Europe.  To provide a frame of reference, one megawatt is adequate to continually power approximately 1,000 average sized U.S. homes.  Our customer base includes utility companies, municipalities, universities, hospitals, government entities and a variety of industrial and commercial enterprises. Our leading geographic market is currently the United States, and we are pursuing opportunities in other countries around the world.

Our power plants provide electricity priced competitively to grid-delivered electricity in certain regions, and our strategy is to continue to reduce costs, which we believe will lead to wider adoption. Our business model involves full life-cycle management of our projects and fuel cell solutions, from design through operation and maintenance, including removal and recycling. By weight, approximately 93% of the entire power plant can be re-used or recycled at the pointend of use in a highly efficient process that is affordable to consumers.its useful life.

Our extensive intellectual property portfolio consists of patents, trade secrets and collective experience, which acts as a foundation for expanding and maximizing our solutions are installed on both sides of the electric meter, meaning that we serve on-site markets supplying power directly to the end user, as well as utility-scale projects that supply power to the electric grid.  portfolio.  

Market Adoption

We target seven distinctvertical markets including:and geographic regions that:

Our business model focuses on providing these vertical markets and geographic regions with highly efficient and affordable distributed generation that delivers de-centralized power in a low-carbon, virtually pollutant-free manner. Geographic markets that meet these criteria and where we are already well established include the Northeastern United States and California.  We have also installed and are operating plants in Europe and Asia, mainly South Korea, in addition to North America.

The UtilitiesCompany has made significant progress with reducing costs and Independentcreating markets since the commercialization of our products in 2003, with more than 255 MW of our SureSource technology currently installed and operating. We believe that we can accelerate and expand the adoption of our distributed power generation solutions through (1) further reductions in the total cost of ownership, (2) continued education regarding the value that our solutions provide, (3) geographic and segment expansion, (4) growing demand for onsite generation, (5) microgrid expansion, and (6) product expansion across biofuels, carbon capture and local hydrogen.  

Fuel Cell Power Producers segment is our largest vertical market with customers that include utilities on the East and West coasts ofPlant Ownership Structures

Historically, in the United States, such as Avangrid Holdings (NYSE: AGR)customers or developers typically purchased our fuel cell power plants outright.  As the size of our fuel cell projects has grown and Long Island Power & Light. In Europe,the availability of project capital has improved, project structures in the U.S. have transitioned to predominantly PPAs.  Under a PPA, the utility customers include E.ON Connecting Energies (DAX: EOAN), oneor end-user of the largest utilitiespower commits to purchase power as it is produced for an extended period of time, typically 10-to-20 years.  Examples of customers that have previously entered into PPAs include universities, a pharmaceutical company, hospitals and utilities.  A primary advantage for the customer is that it does not need to commit its own capital or own a power generating asset, yet it enjoys the benefits of fuel cell power generation.

Once the PPA is executed and project financing is committed, construction of the fuel cell project can begin.  At or around the Commercial Operation Date, the project may be sold to a project investor or retained by the Company.  If the project is sold, revenue from the product sale is recognized, and the Company recognizes revenue separately for the long-term maintenance and service agreement over the term of that agreement.  If the project is retained, electricity, capacity and/or renewable energy credits are recognized monthly over the term of the PPA. We report the financial performance of retained projects as generation revenue and income.

Our decision to retain certain projects is based in part on the recurring, predictable cash flows these projects can offer us, the proliferation of PPAs in the world,industry and Switzerland-based ewz.  In Korea,the potential access to capital.  Retaining PPAs affords the Company the full benefit of future cash flows under the PPAs, which are higher than if we are contractedsell the projects, although it requires more upfront capital investment and financing.  As of October 31, 2019, our operating portfolio of retained projects totaled 26.1 MW with an additional 79.5 MW under development or construction.  The Company plans to operatecontinue to grow this portfolio in a balanced manner, while also selling projects to investors when selling presents the best value and maintain a 20 MW plantopportunity for Korea Southern Power Company (“KOSPO”).the Company’s capital or meets the customer’s desired ownership structure.

Levelized Cost of Energy

Our SureSource power plants are producing power for a variety of industrial, commercial, municipal and government customers, including manufacturing facilities, pharmaceutical processing facilities, universities, healthcare facilities and wastewater treatment facilities.  These institutions desire efficient, ultra-clean continuous power to reduce operating expenses, reduce greenhouse gas emissions and avoid pollutant emissions to meet their sustainability goals.  Combined heat and power fuel cell applications further support economic and sustainability initiatives by minimizing or avoiding the use of combustion based boilers for heat.

Our products are fuel flexible, utilizing clean natural gas and renewable biogas generated by the customer on-site or directed biogas generatedprojects deliver power at a distant location and transported viarate comparable to pricing from the existing common carrier gas pipeline network.  In addition, we have demonstrated other fuel sources including coal syngas and propane.

As intermittent renewable technologies such as wind and solar power are deployed more widely, the need for agrid in our targeted markets.  Policy programs that help to support adoption of clean continuousdistributed power generation that complements and balances these sources becomes greateroften lead to maintain grid stability and consistentbelow-grid pricing.  We measure power supply for on-site applications.  Our installed base includes a numbercosts by calculating the Levelized Cost of locations where our customers use SureSource plants for meeting power needs that complements intermittent wind and/or solar power generation.Energy (“LCOE”) over the life of the project.  

Our fuel cell solutionsThere are well suited for micro-grid applications, either as the sole source of power generation, or integrated with other forms of power generation.  We have fuel cells operating as micro-grids at universities and municipalities, including one university micro-grid owned by Clearway Energy and a municipal-based micro-grid owned by Avangrid.  For the municipal-based system, under normal operation, the fuel cell supplies powerseveral primary elements to the grid.  If the grid is disrupted, the fuel cell plant will automatically disconnect from the grid and power a number of critical municipal buildings. Heat from this fuel cell plant is used by the local high school.

Wastewater treatment facilities, food and beverage processors, and agricultural operations produce biogas as a byproduct of their operations. Disposing of this greenhouse gas can be harmful to the environment if released into the atmosphere or flared. Our SureSource power plants convert this biogas into electricity and heat efficiently and economically. Wastewater facilities with anaerobic digesters are an attractive market for our SureSource solution including the power plant as well as treatment of the biogas. Since our fuel cells operate on the renewable biogas produced by the wastewater treatment process and the heat is used to support daily operations at the wastewater treatment facility, the overall thermal efficiency of these installations is high, supporting economics and sustainability.

We estimate that the addressable distributed generation market and geographies in which we compete for the supply of energy, including distributed hydrogen production, is approximately a $22 billion opportunity, with approximately 40-45% consisting of power plant sales and the remainder representing associated service agreements.  We estimate that the addressable market for the recovery of energy, including our fuel cell carbon capture solution and our gas pipeline application, is approximately $28 billion, assuming only a 1% penetration rate of addressable coal and gas-fired central generation power plant facilities within the geographies where we do business, and only 25% carbon capture at these coal or gas-fired plants.  We believe there are additional market opportunities for capture from industrial thermal sources, such as boilers, in industries like steel and cement production.  The addressable energy storage market is still developing as different technologies are beginning to come to market with different approaches to storage and different storage durations.  We estimate that the addressable market for long duration storage may be in the range of tens of billions of dollars.

Products

Our core fuel cell products offer ultra-clean, highly efficient power generation for customers, including the 1.4 MW SureSource 1500^TM, the 2.8 MW SureSource 3000^TM, and the 3.7 MW SureSource 4000^TM.  The plants are scalable for multi-megawatt utility applications or on-site CHP generation for a broad range of applications.  We provide a comprehensive and complete turn-key fuel cell project that includes project development, EPC services, and O&M, as well as arranging financing structures that enable customers to benefit from the advantages of clean power while avoiding an up-front capital investment.

Our proprietary carbonate fuel cell technology generates electricity directly from a fuel, such as natural gas or renewable biogas, by reforming the fuel inside the fuel cell to produce hydrogen. This internal “one-step” reforming process results in a simpler, more efficient, and cost-effective energy conversion system compared with external reforming fuel cells.  Additionally, natural gas has an established infrastructure and is readily available in our existing and target markets compared to some types of fuel cells that require high purity hydrogen. Our fuel cells operate at approximately 1,100° F. An advantage of high temperature fuel cells is that they do not require the use of precious metal electrodes required by lower temperature fuel cells, such as proton-exchange membrane (“PEM”) fuel cells.  As a result, we are able to use less expensive and readily available industrial metals as catalystsLCOE for our fuel cell components.  

The SureSource product line is a global platform based on carbonate fuel cell technology.  Using a standard design globally enables volume-based cost reduction and optimal resource utilization.  Our power plants utilize a variety of available fuels to produce electricity electrochemically, in a process that is highly efficient, quiet, and due to the avoidance of combustion, produces virtually no particulate pollutants. Thus, our plants generate more power and fewer emissions for a given unit of fuel than combustion-based power generation of a similar size, making them economical and environmentally responsible power generation solutions.  In addition to electricity, our standard configuration produces high quality heat (approximately 700° F), suitable for heating facilities or water, or steam for industrial processes or absorption cooling.  Our system’s efficiencies can reach up to 90%, depending on the application, when configured for CHP.

We market different configurations of the SureSource plants to meet specific market needs for the supply, recovery and storage of energy,projects, including:

Energy Supply

Energy Recovery

Energy Storage

We are developing our long-duration SureSource Storage^TM solution, creating a system that utilizes both SOFC and SOEC technology and using hydrogen as the energy storage medium.  Our solid oxide stacks are capable of alternating between electrolysis and power generation mode.  Instead of producing power from fuel and air, a solid oxide fuel cell stack in electrolysis mode splits water into hydrogen and oxygen using supplied electricity.  Hydrogen is an energy carrier that can be compressed and stored for long durations in storage tubes or underground.  

This allows us to configure efficient and cost effective energy storage solutions where hydrogen is produced from electricity in electrolysis mode and stored until power is needed, at which point the stored hydrogen is used in the same stacks to produce electricity.  Storage capacity is easily expanded by adding additional storage tanks, a low cost approach for storage applications requiring many hours or days of storage capacity.  The need for long duration energy storage behind the meter and on the utility grid will increase as the penetration of intermittent renewable sources on the grid expands.  This solution can be sited adjacent to an electric substation, avoiding the need for transmission.

In summary, our solutions offer many advantages:

Given the level of integration in our business model of manufacturing, installing and operating fuel cell power plants, there are multiple areas and opportunities for cost reductions. We are actively managing and reducing costs in all three LCOE areas as follows:

An important and differentiating factor that benefits fuel cells when comparing LCOE to other forms of power generation is that our solutions provide delivered electricity that minimizes or even avoids the costs of high voltage and distributed transmission. Energy can be produced right at the point of use. When comparing LCOE across different forms of power generation, transmission should be considered.  Power generation far from where the power is used requires transmission, which is a cost to ratepayers, creates risk of system outages, increases cyber attack risk, and is inefficient due to line losses of power in the transmission process. Recent events, including hurricanes along the Gulf

coast and Puerto Rico, wildfires in California, and significant snow and ice storms in the Northeastern U.S., prove that transmission systems are relatively easymore vulnerable to sitestorm-related and other interruptions than locally-generated energy.  

Recently, California was affected by virtuethe utility policy of Public Safety Power Shutoffs (“PSPS”), a preemptive effort by the utility companies to prevent wildfires from being started by electrical equipment during strong and dry wind conditions. Two plants manufactured and operated by FuelCell Energy remained operational as part of their ultra-clean emissions profile, modest space requirementsrespective microgrids in areas impacted by PSPS and quiet operation.  These characteristics facilitateprovided steady, reliable power to the installationUniversity of California, San Diego and the Santa Rita Jail during a time when over 3 million people were generally affected by PSPS.

Producing power plants in urban locations with scarce and expensive land.  A 10 MWnear the point of use also facilitates the development of CHP applications, since it is easier to find a user for fuel cell park only requires about one acre of land whereas an equivalent size solar array requires upwaste heat in distributed applications.  Using waste heat to seven to ten times as much land, illustrating howavoid burning fuel cell parks are easy to site in high density areas with constrained land resources,for thermal applications reduces LCOE (by avoiding fuel cost) and adjacent to the demand source thereby avoiding costly transmission construction.avoids additional carbon emissions and criteria pollutants.

Markets

SureSource Emissions Profile

Fuel cells are non-combustion devices that directly convert chemical energy (fuel) into electricity, heat and water.  Because fuel cells generate power electrochemically rather than by combusting (burning) fuels, they are more efficient in extracting energy from fuels and produce less CO₂ and only trace levels of pollutants compared to combustion-type power generation.generation or traditional power sources used to firm-up intermittent power sources, such as wind and solar.  The following table illustrates the favorable emission profile of our SureSource power plants:

For power plants operating on natural gas, higher electrical efficiency results in lower CO₂, and also results in less fuel needed per kWh of electricity generated and Btu of heat produced. The high efficiency of our products results in significantly less CO₂ per unit of power production compared to the average U.S. fossil fuel power plant, and the carbon emissions are reduced even further when configured for combined heat and power.CHP applications or biofuels.  When our power plants are operating on renewable biogas,Renewable Biogas, government agencies and regulatory bodies generally classify our power plantsthem as carbon neutral due to the renewable nature of the fuel source. The low CO₂ emissions and low criteria pollutants from SureSource power plants have a significant impact on sustainability and air quality because they avoid emissions 24 hours a day.  The high capacity factor of baseload SureSource systems maximizes the impact of their environmental benefits.  The following table shows how the low emissions combined with high capacity factor result in emissions avoidance comparable to or better than intermittent renewable power sources.  While wind and solar renewable power sources may completely avoid these emissions while operating, given their low capacity factors, they avoid fewer emissions than fuel cells only because they operate for fewer hours per day. When wind and solar renewable power sources are not operating, higher emission resources are required to operate, thus diluting the benefits. Additionally, all renewable power sources have life cycle emissions associated with manufacture and disposal.

High electrical efficiency reduces customers' exposureBusiness Strategy

Our business model is based on multiple revenue streams, including power plant and component sales; recurring service revenue, mainly through long-term service agreements; recurring electricity, capacity and renewable attribute sales under PPAs and tariffs for projects we retain in our generation portfolio; and revenue from public and private industry research contracts under Advanced Technologies.

We are a complete solutions provider, controlling the design, manufacturing, sales, installation, operations and maintenance of our patented fuel cell technology under long-term power purchase and service agreements. When principally utilizing long-term PPAs, the end-user of the power or utility hosts the installation and only pays for power as it is delivered, avoiding up-front capital investment. We also develop projects and sell equipment directly to volatilecustomers, providing a complete solution of engineering, installing and servicing the fuel costs, minimizes operating costs,cell power plant under an engineering, procurement and provides maximum electrical output fromconstruction (“EPC”) agreement and a finite fuel source. long-term maintenance and service agreement.  In all cases, FuelCell Energy maintains the long-term recurring service obligation and associated revenues running conterminous with the life of the project.

We target large-scale power users with our megawatt-class installations globally, and currently offer sub-megawatt solutions for smaller power consumers in Europe.  To provide a frame of reference, one megawatt is adequate to continually power approximately 1,000 average sized U.S. homes.  Our customer base includes utility companies, municipalities, universities, hospitals, government entities and a variety of industrial and commercial enterprises. Our leading geographic market is currently the United States, and we are pursuing opportunities in other countries around the world.

Our power plants achieveprovide electricity priced competitively to grid-delivered electricity in certain regions, and our strategy is to continue to reduce costs, which we believe will lead to wider adoption. Our business model involves full life-cycle management of our projects and fuel cell solutions, from design through operation and maintenance, including removal and recycling. By weight, approximately 93% of the entire power plant can be re-used or recycled at the end of its useful life.

Our extensive intellectual property portfolio consists of patents, trade secrets and collective experience, which acts as a foundation for expanding and maximizing our solutions portfolio.  

Market Adoption

We target vertical markets and geographic regions that:

Our business model focuses on providing these vertical markets and geographic regions with highly efficient and affordable distributed generation that delivers de-centralized power in a low-carbon, virtually pollutant-free manner. Geographic markets that meet these criteria and where we are already well established include the Northeastern United States and California.  We have also installed and are operating plants in Europe and Asia, mainly South Korea, in addition to North America.

The Company has made significant progress with reducing costs and creating markets since the commercialization of our products in 2003, with more than 255 MW of our SureSource technology currently installed and operating. We believe that we can accelerate and expand the adoption of our distributed power generation solutions through (1) further reductions in the total cost of ownership, (2) continued education regarding the value that our solutions provide, (3) geographic and segment expansion, (4) growing demand for onsite generation, (5) microgrid expansion, and (6) product expansion across biofuels, carbon capture and local hydrogen.  

Fuel Cell Power Plant Ownership Structures

Historically, in the United States, customers or developers typically purchased our fuel cell power plants outright.  As the size of our fuel cell projects has grown and the availability of project capital has improved, project structures in the U.S. have transitioned to predominantly PPAs.  Under a PPA, the utility or end-user of the power commits to purchase power as it is produced for an extended period of time, typically 10-to-20 years.  Examples of customers that have previously entered into PPAs include universities, a pharmaceutical company, hospitals and utilities.  A primary advantage for the customer is that it does not need to commit its own capital or own a power generating asset, yet it enjoys the benefits of fuel cell power generation.

Once the PPA is executed and project financing is committed, construction of the fuel cell project can begin.  At or around the Commercial Operation Date, the project may be sold to a project investor or retained by the Company.  If the project is sold, revenue from the product sale is recognized, and the Company recognizes revenue separately for the long-term maintenance and service agreement over the term of that agreement.  If the project is retained, electricity, capacity and/or renewable energy credits are recognized monthly over the term of the PPA. We report the financial performance of retained projects as generation revenue and income.

Our decision to retain certain projects is based in part on the recurring, predictable cash flows these projects can offer us, the proliferation of PPAs in the industry and the potential access to capital.  Retaining PPAs affords the Company the full benefit of future cash flows under the PPAs, which are higher than if we sell the projects, although it requires more upfront capital investment and financing.  As of October 31, 2019, our operating portfolio of retained projects totaled 26.1 MW with an additional 79.5 MW under development or construction.  The Company plans to continue to grow this portfolio in a balanced manner, while also selling projects to investors when selling presents the best value and opportunity for the Company’s capital or meets the customer’s desired ownership structure.

Levelized Cost of Energy

Our fuel cell projects deliver power at a rate comparable to pricing from the grid in our targeted markets.  Policy programs that help to support adoption of clean distributed power generation often lead to below-grid pricing.  We measure power costs by calculating the Levelized Cost of Energy (“LCOE”) over the life of the project.  

There are several primary elements to LCOE for our fuel cell projects, including:

Given the level of integration in our business model of manufacturing, installing and operating fuel cell power plants, there are multiple areas and opportunities for cost reductions. We are actively managing and reducing costs in all three LCOE areas as follows:

An important and differentiating factor that benefits fuel cells when comparing LCOE to other forms of power generation is that our solutions provide delivered efficiencyelectricity that minimizes or even avoids the costs of high voltage and distributed transmission. Energy can be produced right at the point of use. When comparing LCOE across different forms of power generation, transmission should be considered.  Power generation far from where the power is used requires transmission, which is a cost to ratepayers, creates risk of system outages, increases cyber attack risk, and is inefficient due to line losses of power in the transmission process. Recent events, including hurricanes along the Gulf

coast and Puerto Rico, wildfires in California, and significant snow and ice storms in the Northeastern U.S., prove that transmission systems are more vulnerable to storm-related and other interruptions than locally-generated energy.  

Recently, California was affected by the utility policy of Public Safety Power Shutoffs (“PSPS”), a preemptive effort by the utility companies to prevent wildfires from being started by electrical equipment during strong and dry wind conditions. Two plants manufactured and operated by FuelCell Energy remained operational as our distributed solutions generatepart of their respective microgrids in areas impacted by PSPS and provided steady, reliable power to the University of California, San Diego and the Santa Rita Jail during a time when over 3 million people were generally affected by PSPS.

Producing power near the point of use also facilitates the development of CHP applications, since it is easier to find a user for fuel cell waste heat in distributed applications.  Using waste heat to avoid burning fuel for thermal applications reduces LCOE (by avoiding fuel cost) and avoids additional carbon emissions and criteria pollutants.

Markets

Vertical Markets

Access to clean, affordable and reliable power has transformed how most of the line losses inherentworld lives today. The ability to provide power cleanly and efficiently is taking on greater importance and urgency in transmission.many regions of the world. FuelCell Energy’s products and services are specifically designed to deliver such clean, efficient power globally.  

Central generation and its associated transmission requirements and distribution grid are difficult to site, costly, prone to interruption and generally take many years to permit and build.  Some types of power generation that were widely adopted in the past, such as nuclear and coal power, are no longer welcome in certain regions of the world.  The electric gridcost and impact to public health and the environment of pollutants and greenhouse gas emissions impact the siting of new power generation.  The attributes of SureSource power plants address these challenges by providing virtually particulate-free baseload power and, where desired, thermal energy at the point of use in a highly-efficient process that is affordable to consumers.

We target distinct markets, including:

The utilities and independent power producers market is our largest vertical market with customers that include utilities on the East and West coasts of the United States, such as Avangrid Holdings, Long Island Power & Light, Southern California Edison and Pacific Gas & Electric. In Europe, utility customers include E.ON Connecting Energies, one of the largest utilities in the world, and Switzerland-based ewz.  In South Korea, we are contracted to operate and maintain a 20 MW plant for Korea Southern Power Company (“KOSPO”).

Our SureSource power plants are producing power for a variety of industrial, commercial, municipal and government customers, including manufacturing facilities, pharmaceutical processing facilities, universities, healthcare facilities and wastewater treatment facilities.  These institutions desire efficient, clean and continuous power to reduce operating expenses, reduce greenhouse gas emissions and avoid pollutant emissions to meet their sustainability goals, while boosting resiliency and limiting dependence on the distribution grid.  CHP applications further support economic and sustainability initiatives by minimizing or avoiding the use of combustion-based boilers for heat.  Our SureSource power plants are unique in their ability to run on biofuels. With the growing market for anaerobic digestion (the production of Biogas from the breakdown of biodegradable materials in the absence of oxygen) and increasingly stringent regulations regarding air quality, we see a growing market opportunity that is only approximately 35% electricallyperfectly suited for our fuel

cell design. SureSource power plants operating on Renewable Biogas are an especially compelling value proposition as they convert a waste product into clean electricity and heat, while eliminating flaring, which addresses certain economic and sustainability challenges faced by our customers. Biogas is generated by the decay of organic material (i.e., biomass). This decaying organic material releases methane, or Biogas. As a harmful greenhouse gas, Biogas cannot be released directly into the atmosphere. Flaring creates pollutants and wastes this potential fuel source. Capturing and using Biogas as a fuel addresses these challenges and provides a carbon-neutral renewable fuel source. Our patented, proprietary clean-up skid, SureSource Treatment^TM, provides an economical and reliable system for treating Biogas for use on-site at the Biogas production facility.

Wastewater treatment facilities, food and beverage processors and agricultural operations produce Biogas as a byproduct of their operations. Disposing of this greenhouse gas can be harmful to the environment if released into the atmosphere or flared. Our SureSource power plants convert this Biogas into electricity and heat efficiently and economically. Wastewater facilities with anaerobic digesters are an attractive market for our SureSource solution including the power plant as well as treatment of the Biogas. Many wastewater treatment plants currently flare Biogas produced in the anaerobic digestion process, emitting NOx, SOx and particulates into the atmosphere, which does not meet many air quality regulations. Since our fuel cells operate on the Renewable Biogas produced by the wastewater treatment process and the heat is used to support daily operations at the wastewater treatment facility, the overall thermal efficiency of these installations is high, supporting economics and sustainability. In addition, the fuel cell does not emit the harmful NOx, SOx and particulates that come out of a flare. On-site Biogas projects are more efficient and typically does not support CHP configurations.more economical than Directed Biogas projects because less gas processing is required compared to the processing needed to get the on-site gas to pipeline quality.  The unique chemistry of carbonate fuel cells allows them to use low Btu on-site Biogas with no reduction in output or efficiency compared to operation on natural gas.  We have developed proprietary Biogas cleanup and contaminant monitoring equipment which, combined with the inherent suitability of the carbonate fuel cell chemistry, gives us an advantage in on-site Biogas applications.  Our SureSource 1500 and SureSource 3000 power plants are the only systems certified to CARB emissions standards under the Distributed Generation Certification Program for operation with on-site Biogas.

Our fuel cell solutions are also well suited for microgrid applications, either as the sole source of power generation or integrated with other forms of power generation.  We have fuel cells operating as microgrids at universities and municipalities, including one university microgrid owned by Clearway Energy and a municipal-based microgrid owned by Avangrid.  For the municipal-based system, under normal operation, the fuel cell supplies power to the grid.  If the grid is disrupted, the fuel cell plant will automatically disconnect from the grid and power a number of critical municipal buildings. Heat from this municipal-based fuel cell plant is used by the local high school. As mentioned above, our fuel cell-based microgrids have continued operating during PSPS events in California.

Manufacturing and Service Facilities

We design and manufacture the core SureSource fuel cell components that are stacked on top of each other to build a fuel cell stack.  For MW-size power plants, four fuel cell stacks are combined to build a fuel cell module.  To complete the power plant, the fuel cell module or modules are combined with the BOP.  The mechanical BOP processes the

incoming fuel such as natural gas or renewable biogas and includes various fuel handling and processing equipment such as pipes and blowers. The electrical BOP processes the power generated for use by the customer and includes electrical interface equipment such as an inverter.  The BOP components are either purchased directly from suppliers or the manufacturing is outsourced based on our designs and specifications.  This strategy allows us to leverage our manufacturing capacity, focusing on the critical aspects of the power plant where we have specialized knowledge, expertise and possess extensive intellectual property.  BOP components are shipped directly to a project site and are then assembled with the fuel cell module into a complete power plant.

We operate a 167,000 square-foot manufacturing facility in Torrington, Connecticut where we produce the individual cell packages and assemble the fuel cell modules. This facility also houses our global service center. It is expected that, in early fiscal year 2019, ourOur completed modules will beare conditioned in Torrington as well, and shipped directly to customer sites, rather than first being shipped to our Danbury, Connecticut location for conditioning as in the past. This recent relocation of conditioning activities to the Torrington, Connecticut factory location improves the cost and efficiency of the final manufacturing process.sites.  Annual capacity (module manufacturing, final assembly, testing and conditioning) is 100 MW per year with full utilization under the Torrington facility’s current configuration.configuration when being fully utilized.  The Torrington facility is sized to accommodate eventual annual production capacity of 200 MW per year.

The expansion of the Torrington facility has enabled the consolidation of warehousing and service facilities, which has resulted in reduced leasing expenses.  The additional space is also expected to lead to additional manufacturing efficiencies by providing the needed space to re-configure the manufacturing lines without interrupting production.  As demand supports, a second phase will be undertaken to add manufacturing equipment to increase annual capacity to 200 MW.  

We design and manufacture the core SureSource fuel cell components that are stacked on top of each other to build a fuel cell stack.  For megawatt-scale power plants, four fuel cell stacks are combined to build a fuel cell module.  To complete the power plant, the fuel cell module or modules are combined with the BOP.  The State of Connecticut had previously extended two low interest long term loansmechanical BOP processes the incoming fuel such as natural gas or Renewable Biogas and includes various fuel handling and processing equipment such as pipes and blowers. The electrical BOP processes the power generated for use by the customer and includes electrical interface equipment such as an inverter.  The BOP components are either purchased directly from suppliers or the manufacturing is outsourced based on our designs and specifications.  This strategy allows us to us (one for each

leverage our manufacturing capacity, focusing on the critical aspects of the two phases)power plant where we have specialized knowledge and upexpertise and possess extensive intellectual property.  BOP components are shipped directly to $10.0 million of tax credits.  Each loan was anticipated to be $10.0 million,a project site and are then assembled with an interest rate of 2.0% andthe fuel cell module into a term of 15 years.  Originally, up to 50% of the principal was forgivable if certain job creation and retention targets are met.  We previously received the proceeds of the first $10 million loan to support the first phase of the expansion and have received extensions from the State of Connecticut to meet the required job targets.complete power plant.

The Torrington production and service facility and the Danbury corporate headquarters and research and development facility are ISO 9001:2015 and ISO 14001:2015 certified and our Field Service Operationsoperation (which maintains the installed fleet of our plants) is ISO 9001:2015 certified, reinforcing the tenets of the FuelCell Energy Quality Management SystemEnergy’s quality management system and our core values of continual improvement and commitment to quality, environmental stewardship, and customer satisfaction. Sustainability is promoted throughout our organization. We manufacture SureSource Products and manage them through end-of-life using environmentally friendly business processes and practices, certified to ISO 14001:2015. We continually improve how we plan and execute across the entire product life cycle. We strive for “cradle-to-cradle” sustainable business practices, incorporating sustainability in our corporate culture. We utilize “Design for Environment” principles in the design, manufacture, installation and servicing of our power plants. “Design for Environment” principles aim to reduce the overall human health and environmental stewardship.impact of a product, process or service, when such impacts are considered across the product’s lifecycle. We maintain a chain of custody and responsibility of our SureSource products throughout the product life cycle. When our plants reach the end of their useful lives, we can refurbish and re-use certain parts and then recycle most of what we cannot re-use. By weight, approximately 93% of the entire power plant can be re-used or recycled at the end of its useful life.

We have a manufacturing and service facility in Taufkirchen, Germany that has the capability to perform final module assembly for up to 20 MW per year of sub-megawatt fuel cell power plants forto service the remaining sub-megawatt fuel cell power plantsplant demand in the European market. Our European service activities are also operated out of this location. Our operations in Europe are certified under both ISO 9001:2015 and ISO 14001:2015.

We have a research and development facility in Calgary, Alberta, Canada that is focused on the engineering and development of the Company’s SOFC and SOEC technology.

Raw Materials and Supplier Relationships

We use various commercially available raw materials and components to construct a fuel cell module, including nickel and stainless steel, which are key inputs toin our manufacturing process. Our fuel cell stack raw materials are sourced from multiple vendors and are not considered precious metals.  We have a global integrated supply chain.  While we manufacture the fuel cell module in our Torrington facility, the electrical and mechanical BOPs are assembled by and procured from several suppliers. All of our suppliers must undergo a stringent and rigorous qualification process. We continually evaluate and qualify new suppliers as we diversify our supplier base in our pursuit of lower costs and consistent quality. We purchase mechanical and electrical BOP componentrycomponents from third party vendors, based on our own proprietary designs.

Engineering, Procurement and Construction (“EPC”)

We provide customers with complete turn-key solutions, including the development, engineering, procurement, construction, interconnection and operations for our fuel cell projects.  From an EPC standpoint, we have an extensive history of safe and timely delivery of turn-key projects.  We have developed relationships with many design firms and licensed general contractors and have a repeatable, safe, and efficient execution philosophy that has been successfully demonstrated in numerous jurisdictions, both domestically and abroad, all with an exemplary safety record.  The ability to rapidly and safely execute installations minimizes high costhigh-cost construction period financing and can assist customers in certain situations when the commercial operating dateCommercial Operations Date is time sensitive.

Services and Warranty Agreements

We offer a comprehensive portfolio of services, including engineering, project management and installation, and long-term operating and maintenance programs, including trained technicians that remotely monitor and operate our plants around the world, 24 hours a day and 365 days a year.  We directly employ field technicians to service the power plants and maintain service centers near our customers to ensuresupport the high availabilityAvailability of our plants.  

For all operating fuel cell plants not under a PPA, the customers purchase long-term service agreements, some of which have terms of up to 20 years. Pricing for service contracts is based upon the value of service assurance and the markets in which we compete and includes all future maintenance and fuel cell module exchanges.  Each model of our SureSource power plants has a design life of 25 to 3025-to-30 years. The fuel cell modules, with legacy modules having a 5 to5-year cell design life and current production modules having a 7-year cell design life, go through periodic replacement, while the BOP systems, which consist of conventional mechanical and electrical equipment, are maintained over the plant life.life of the plant.

Under the typical provisions of both our service agreements and PPAs, we provide services to monitor, operate and maintain power plants to meet specified performance levels. Operations and maintenance is a key driver for power plants to deliver their projected revenue and cash flows.  Many of our PPAs and service agreements include guarantees for system performance, including electrical output and heat rate. Should the power plant not meet the minimum performance levels, we may be required to replace the fuel cell module with a new or used replacement module and/or pay performance penalties.  The service aspects of our business model provide a recurring and predictable revenue stream for the Company.  We have committed future production for scheduled fuel cell module exchanges under service agreements and PPAs through the year 2038.  The pricing structure of the service agreements incorporates these scheduled fuel cell module exchanges and the committed nature of this production facilitates our production planning. Many of our PPAs and service agreements include guarantees for system performance, including electrical output and heat rate. Should the power plant not meet the minimum performance levels, we may be required to replace the fuel cell module with a new or used replacement module and/or pay performance penalties.  Our goal is to optimize the power plants to meet expected operating parameters throughout their contracted service term.

In addition to our service agreements, we provide a warranty for our products against manufacturing or performance defects for a specific period of time against manufacturing or performance defects.time. The warranty term in the U.S. is typically 15 months after shipment or 12 months after acceptance of our products.  We accrue for estimated future warranty costs based on historical experience.

License Agreements and Royalty Income; Relationship with POSCO Energy

We have historicallyLicense Agreement with ExxonMobil Research and Engineering Company

EMRE and FuelCell Energy began working together in 2016 under an initial Joint Development Agreement with a focus on better understanding the fundamental science behind carbonate fuel cells for use in advanced applications and specifically how to increase efficiency in separating and concentrating carbon dioxide from the exhaust of natural gas-fueled power generation.

In June 2019, we entered into a license agreement with EMRE, a wholly-owned subsidiary of ExxonMobil Corporation, to facilitate the further development of our SureSource Capture^TM product (the “EMRE License Agreement”). Pursuant to the EMRE License Agreement, the Company granted EMRE and its affiliates a non-exclusive, worldwide, fully-paid, perpetual, irrevocable, non-transferable license and right to use our patents, data, know-how, improvements, equipment designs, methods, processes and the like to the extent it is useful to research, develop and commercially exploit carbonate fuel cells in applications in which the fuel cells concentrate carbon dioxide from industrial and power sources and for any other purpose attendant thereto or associated therewith, in exchange for a $10 million payment. Such right and license is sublicenseable to third parties performing work for or with EMRE or its affiliates, but shall not otherwise be sublicenseable.

The EMRE License Agreement facilitated the execution of a new joint development agreement with EMRE, effective October 31, 2019 and executed in fiscal year 2020, pursuant to which we will continue exclusive research and development efforts with EMRE to evaluate and develop new and/or improved carbonate fuel cells to reduce carbon dioxide emissions from industrial and power sources, in exchange for (a) payment of (i) an exclusivity and technology access fee of $5.0 million, (ii) up to $45.0 million for research and development efforts, and (iii) milestone-based payments of up to $10.0 million after certain technological milestones are met, and (b) certain licenses.  As a result of the execution of the EMRE License Agreement in fiscal year 2020, the associated revenue and backlog will be accounted for in fiscal year 2020.

License Agreements with POSCO Energy

From approximately 2007 through 2015, we relied on POSCO Energy Co., Ltd. (“POSCO Energy”) to develop and grow the South Korean and Asian markets for our products and services.  

We record license fees and are entitled to receive royalty income from POSCO Energy related to manufacturing and technology transfer agreements entered into in 2007, 2009 and 2012.  The Cell Technology Transfer Agreement ("CTTA"), executed in October 2012, provides POSCO Energy with the technology rights to manufacture, sell, distribute and service our SureSource power plants300, SureSource 1500 and SureSource 3000 fuel cell technology in South Korea and the right to sell power plants throughout Asia. POSCO Energy built a cell manufacturing facility in Pohang, South Korea which became operational in late 2015. Annual production capability is 100 MW and the building is sized to accommodate up to 200 MW of annual production.

In October 2016, the Company and POSCO Energy extended the terms of the 2007 and 2009 licensemanufacturing and technology transfer agreements to be consistent with the term of the CTTA, which expires on October 31, 2027.   The CTTA requires POSCO Energy to pay us a 3.0% royalty on POSCO Energy net product sales, as well as a royalty on scheduled fuel cell module replacements under service agreements for modules that were built by POSCO Energy and installed at plants in Asia under the terms of long termlong-term service agreements between POSCO Energy and its customers. While the aforementioned manufacturing and technology transfer agreements entered into in 2007, 2009 and 2012 remain in effect, due to certain actions and inactions of POSCO Energy, the Company has not realized any material revenues, royalties or new projects developed by POSCO Energy since 2016.

In March 2017, we entered into a memorandum of understanding (“MOU”) with POSCO Energy to permit us to directly develop the Asian fuel cell business, including the right for us to sell SureSource solutions in South Korea and the broader Asian market. In June 2018, POSCO Energy advised us in writing that it was terminating the MOU effective July 15, 2018.  Pursuant to the terms of the MOU, notwithstanding its termination, we will continue to execute on sales commitments in Asia secured in writing prior to July 15, 2018. POSCO Energy has ceased communications with us.   2018, including the 20 MW power plant installed for KOSPO.

On or about November 2, 2018, POSCO Energy served FuelCell Energy with an arbitration demand, initiating a proceeding to resolve various outstanding amounts between the companies. The parties amicably resolved the arbitration proceeding in July 2019. Since that date, we have made numerous attempts to engage with POSCO Energy to address the need for deployment of carbonate fuel cell technology in the Asian market in accordance with the requirements of the manufacturing and technology transfer agreements, our understanding of the desire of the South Korean government to advance fuel cell and hydrogen technology, and the needs of the Asian market, but have made little progress to date.

In November 2019, POSCO Energy spun-off its fuel cell business into a new entity, Korea Fuel Cell, Ltd. (“KFC”). As part of the spin-off, POSCO Energy transferred manufacturing and service rights under the aforementioned manufacturing and technology transfer agreements to KFC, but retained distribution rights, including trademarks, and severed its own liability under the aforementioned manufacturing and technology transfer agreements. We believe that these actions are all in material breach of the terms of the CTTA and other manufacturing and technology transfer agreements and are effectively a misappropriation of the Company’s intellectual property. We have made counterclaimsformally objected to POSCO Energy’s spin-off, and believe we have valid defensesPOSCO Energy has posted a bond to secure any liabilities to FuelCell Energy arising out of the claims made by POSCO Energy. The Company does not currently expect the results of this arbitration to have a material adverse effect on the Company.  

spin-off. In light of recent developmentsthe situation with POSCO Energy, we are evaluating all of our options with respect to our relationship and agreements with POSCO Energy.

Advanced Technologies Programs (Third Party Funded Research and Development)

We undertake both privately-funded and public research and development to expandEnergy, including trade related matters, POSCO Energy’s material breach of its obligations under the markets for our power plants, reduce costs, and expand our technology portfolio in complementary high-temperature fuel cell systems. This research builds on our expertiseCTTA and the versatilitymanufacturing and technology transfer agreements, and the misappropriation of our fuel cell power plants and contributes to the development of potentially new end markets for our commercial product solution portfolio. Our power plants can be configured to provide a number of value streams including clean electricity, high quality usable heat, hydrogen suitable for vehicle fueling or industrial purposes as well as a configuration to concentrate CO₂ from coal, biomass and natural gas fired power plants and industrial applications.  Our Advanced Technologies Programs are focused on commercializing solutions within three strategic areas: (1) carbon capture for emissions reduction and power generation; (2) distributed hydrogen production, compression, and recovery; and (3) SOFC/SOEC for stationary power generation and energy storage. The revenue and associated costs from government and third party sponsored research and development is classified as “Advanced Technologies contract revenues” and “Cost of Advanced Technologies contract revenues,” respectively, in our consolidated financial statements.intellectual property.

We have historically worked on technology development with various U.S. government departments and agencies, including the Department of Energy (DOE), the Department of Defense (DOD), the Environmental Protection Agency (EPA), the Defense Advanced Research Projects Agency (DARPA), the Office of Naval Research (ONR), and the National Aeronautics and Space Administration (NASA). Government funding, principally from the DOE, provided 8%, 9% and 8% of our revenue for the fiscal years ended October 31, 2018, 2017, and 2016, respectively.

Significant commercialization programs on which we are currently working include:

Carbon Capture – Power generation and industrial applications are the source of two-thirds of the world’s carbon emissions. Coal and natural gas are abundant, low cost resources that are widely used to generate electricity in developed and developing countries, but burning these fuels, as well as burning biomass, results in the emission of criteria pollutants and CO₂.  Cost effective and efficient carbon capture from power generation and industrial applications globally represents a large market because it could enable clean use of all available fuels. Our carbonate fuel cell technology separates and concentrates CO₂ as a side reaction during the power generation process. Capturing CO₂ as a side reaction while generating additional valuable power is an approach that could be more cost effective than other systems which are being considered for carbon capture.

We announced a five year agreement with ExxonMobil (NYSE: XOM) in 2016 to pursue research and development of fuel cell carbon capture for central generation gas-fired power plants. Research and development under that agreement has progressed and continues to progress at an accelerated pace. In 2018, we completed the design and engineering work for the installation of a megawatt-class carbon capture fuel cell power plant at a mixed coal/gas-fired power station owned by Alabama Power, a subsidiary of Southern Company.  This project was supported by an award from the DOE and ExxonMobil. The Company has been working to secure funding for the second phase of the project, which would include construction of the carbon capture fuel cell power plant.

Distributed Hydrogen Production, Compression, and Recovery - On-site or distributed hydrogen generation, produced cleanly, represents an attractive market.  Our high temperature fuel cells generate electricity directly from a fuel by reforming the fuel inside the fuel cell to supply hydrogen for the electrical generation process.  Gas separation technology can be added to capture hydrogen that is not used by the electrical generation process, and we term this configuration SureSource Hydrogen. This value-added proposition may be compelling for industrial users of hydrogen and transportation applications, further summarized as follows:

Fueling Applications:  We previously announced a renewable hydrogen generation project under a hydrogen power purchase agreement with Toyota (NYSE: TM).  The multi-megawatt SureSource Hydrogen plant will be located at the Port of Long Beach, California and will use renewable directed biogas for fuel.  Toyota will purchase the hydrogen output of approximately 1,200 kg per day to fuel its fuel cell cars that arrive at the Port from overseas as well as fuel a Class 8 fuel cell truck located at the Port.  Toyota will also purchase a portion of the renewable electricity generated by the fuel cell, with the remainder of the electricity to be sold to the local utility under the California BioMAT program.

We previously demonstrated renewable hydrogen generation under a three year project at the Orange County Wastewater Treatment Facility in Irvine, California, utilizing renewable biogas to supply hydrogen for use in fuel cell vehicle fueling and to produce clean renewable electricity.  The demonstration was performed under a sub-contract to Air Products (NYSE: APD), with funding provided by the DOE, California Air Resources Board, South Coast Air Quality Management District, Orange County Sanitation District, and Southern California Gas Company.

SOFC/SOEC Development and Commercialization: We are working towards commercialization of solid oxide fuel cell technology to target long-duration storage applications utilizing hydrogen as an energy carrier and storage medium.  SOFC power plant design and manufacturing is complementary to our carbonate technology-based MW scale product line and affords us the opportunity to leverage our field operating history, existing expertise in power plant design, fuel processing and high volume manufacturing capabilities, and our existing installation and service infrastructure.  Additionally, the target market for storage applications is electric utilities, which is a market in which we are already active.  

We perform SOFC/SOEC research and development at our Danbury facility as well as at our dedicated SOFC/SOEC facility in Calgary, Canada.  We are working under a variety of awards from the DOE for development and commercialization of both SOFC and SOEC.  We are currently installing a demonstration SOFC power plant at the Clearway Center in Pittsburgh, Pennsylvania.

We believe there are significant market opportunities for distributed hydrogen production, carbon capture, solid oxide fuel cell solutions and energy storage. The demonstration projects described above are steps on the commercialization road map as we leverage third-party resources and funding to accelerate the commercialization and realize the market potential for each of these solutions.

Company Funded Research and Development

In addition to research and development performed under research contracts, including as described in Advanced Technology Programs, we also fund our own research and development projects including extending module life, increasingactivities to support the power output of our modulescommercial fleet with product enhancements and reducing the cost of our products.  Current initiatives include increasing the net power output of the fuel cell stacks to 375 kW from 350 kW.  We also recentlyimprovements. During fiscal year 2018, we launched our seven-year life stacks, which extended our stack life from five years to seven years. Greater power output and improved longevity are expected to lead to improved gross margin profitability on a per-unit basis for each power plant sold and improved profitability of service contracts, which willare expected to support expanding gross margins for the Company.

In addition to output and life enhancements, we designed and introduced the 3.7 megawattMW SureSource 4000 configuration with increased electrical efficiency, and we continually invest in cost reduction and improving the performance, quality and serviceability of our plants. These efforts continuallyare intended to improve our value proposition.

Company-funded research and development is included in Research and development expenses (operating expenses) in our consolidated financial statements.  The total research and development expenditures in the consolidated statement of operations, including third party and Company-funded expenditures, are as follows:

BacklogBacklog

TheBacklog represents definitive agreements executed by the Company had a contract backlog totaling approximately $1.2 billion as of October 31, 2018 compared to $554.2 million as of October 31, 2017. As of October 31, 2018 and 2017, backlog included approximately $316.0 million and $182.3 million, respectively, of service agreements.  Generationour customers.

Contract backlog as of October 31, 2019 and 2018 and 2017 was $839.5 million and $296.3 million, respectively.  consisted of the following (in thousands):

Service and generation backlog as of October 31, 20182019 had ana weighted average term of approximately 1918 years, weightedwith weighting based on dollar backlog and utility service contracts of up to twenty20 years in duration.  As of October 31, 2018, product sales backlog totaled approximately $1.0 thousand compared to $31.3 million as of October 31, 2017.  As of October 31, 2018, Advanced Technologies contracts backlog totaled $32.4 million, of which $15.9 million was funded and $16.5 million was unfunded, compared to $44.3 million as of October 31, 2017, of which $24.5 million was funded and $19.8 million was unfunded.duration at inception.  Generally, our government research and development contracts are subject to the risk of termination at the convenience of the contracting agency.

Our backlog amount outstanding is not indicative of amounts to be earned in the upcoming fiscal year.  The specific elements of backlog may vary in terms of timing and revenue recognition from less than one year to up to twenty20 years.  In addition, the

The Company may choose to sell or retain operating power plants on the balance sheet, rather than selling them, thus creating variability in timing of revenue recognition.  Accordingly, the timing and the nature of our business makes it difficult to predict what portion of our backlog will be filled in the next fiscal year.

Backlog represents definitive agreements executed by the Company and our customers. As of October 31, 2018, we also had project awards totaling between $600.0 million and $1.0 billion, depending on whether the projects are sold or retained as part of our generation portfolio.  Project awards referenced by the Company are notifications that the Company has been selected, typically through a competitive bidding process, to enter into definitive agreements. These awards have been publicly disclosed.  Negotiations are in process and if successfully completed, project awards will become backlog. 

Fuel Cell TechnologiesTechnologies

Fuel cell technologies are classified according to the electrolyte used by each fuel cell type. Our SureSource technology utilizes a carbonate electrolyte. Carbonate-based fuel cells are well-suited for megawatt-class applications, offering a number of advantages over other types of fuel cells in the markets we are pursuing. our target markets.

These advantages include carbonate fuel cells'include:

We are also actively developing SOFC technology, as discussed in the prior “Advanced Technologies Programs” section.  Other fuel cell types that may be used for commercial applications include phosphoric acid and PEM.

The following table illustrates the four principal types of fuel cells, highlighting typical market applications, industry estimates of the electrical efficiency, expected capacity range, and versatility for applications in addition to power generation:

Competition

Our SureSource power plants compete in the marketplace for stationary distributed generation. In addition to different types of stationary fuel cells, some other technologies that compete in this marketplace include micro-turbines and reciprocating gas engines.

Several companies in the U.S. are engaged in fuel cell development, although we are the only domestic company engaged in manufacturing and deployment of stationary carbonate fuel cells.Carbonate Fuel Cells. Other emerging fuel cell technologies (and the companies developing them) include small or portable PEM fuel cells (Ballard Power Systems, Plug Power, and increasing activity by numerous automotive companies including Toyota, Hyundai, Honda and GM), stationary phosphoric acid fuel cells (Doosan), stationary solid oxide fuel cells (Bloom Energy), and small residential solid oxide fuel cells (Ceres Power Holdings and Ceramic Fuel Cells Ltd.).  Each of these competitors with stationary fuel cell applications has the potential to capture market share in our target markets.

Other than fuel cell developers, we may compete with companies such as Caterpillar, Cummins, Wartsilla,Wartsila, MTU Friedrichshafen GmbH (MTU), and Detroit Diesel, which manufacture more mature combustion-based distributed power

generation equipment, including various engines and turbines, and have well-establishedestablished manufacturing and distribution operations along with product operating and cost features. Competition on larger MW projects may also come from gas turbine companies like General Electric, Caterpillar Solar Turbines and Kawasaki.