SecProbe.io

CORRESP
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filename1.htm

              RICHARD
                A. KRANTZ

              Financial
                Centre

              695
                East Main Street

              P.O.
                Box 10305

              Stamford,
                CT 06904-2305

              Main
                (203) 462-7500

              Fax
                (203) 462-7599

              rkrantz@rc.com

              Direct
                (203) 462-7505

              Also
                admitted in New York

              and
                Massachusetts

    June
      9,
      2006

    Ms.
      Kate
      Tillan

    Assistant
      Chief Accountant

    United
      States Securities and Exchange Commission

    450
      Fifth
      Street, N.W.

    Washington,
      D.C. 20549

              Re:

              FuelCell
                Energy Inc.

              Form
                10-K for the year ended October 31, 2005

              Filed
                January 17, 2006

              File
                No. 001-14204

    Dear
      Ms.
      Tillan:

    This
      correspondence is in response to our conference call with you on June 6, 2006.
      We appreciate that you took the time to discuss the remaining issues with us
      on
      the conference call and we believe it was helpful in formulating this response.

    Based
      on
      that call, we believe there are two remaining issues which relate to the
      Company’s Series I Preferred Shares. Specifically, you have asked the Company to
      (1) further discuss the accounting treatment for the accretion of these
      preferred shares and (2) provide additional analysis regarding the
      classification of the preferred shares of subsidiary and the relationship to
      the
      parent company. The Company’s responses are as follows:

              (1)

              Accounting
                treatment for accretion of discount related to Series 1 Preferred
                Shares.

    FuelCell
      Energy, Inc. (“FuelCell” or the “Company”) advises the Staff that it acquired
      the Series I Preferred Shares through a business combination. In valuing this
      security, the Company followed Statement of Financial Accounting Standard No.
      141, “Business Combinations” (“SFAS 141”). These shares were valued with the
      assistance of a valuation expert using the income approach to estimate the
      fair
      value of the securities based on expected future economic benefits. In applying
      this method, cash flows were estimated for the life of the securities and then
      discounted to present value to arrive at an indication of fair value.
The
      amounts projected and then discounted include future dividend payments and
      assumed conversion of the securities in 2020.
      Implicit
      in this valuation are certain assumptions regarding the timing of dividend
      payments, accrued interest and conversion of the securities. At the time of
      the
      business combination, the fair value (at present value) of the Series 1
      Preferred Shares was determined to be $9.1 million.

      Ms.
        Kate
        Tillan

      Securities
        and Exchange Commission

      June
        9,
        2006

      Page
        2

    In
      order to value this instrument subsequent to the date of the business
      combination, FuelCell advises the Staff that it is accreting the discounted
      value of the Series Preferred Shares over the assumed life of the securities
      utilized in estimating the future cash flows.
      The
      Company has previously provided the Staff with the Series 1 Preferred Shares
      amortization schedule. As FuelCell is in a retained deficit position, the
      Company accretes the discount by making a charge against APIC.

    Quarterly
      dividends of Cdn.$312,500 accrue on the Series 1 Preferred Shares. These are
      reflected as a component of “Preferred stock dividends” in calculating “Loss to
      common shareholders” on the Company’s Consolidated Statement of
      Operations.

    In
      determining the proper accounting for the fair value of the Series 1 Preferred
      Shares, the Company considered the following:

              ·

              The
                Company considered whether or not to accrete the discounted cash
                flows. It
                was determined that consistent with accounting for other instruments
                carried at fair value based on discounted cash flows, that accreting
                to
                the gross fair value based on total estimated cash flows through
                2020 (the
                assumed life of the securities) was the best approach to valuing
                this
                security going forward and is the most meaningful presentation of
                those
                shares to the readers of the Company’s consolidated financial statements.

              ·

              In
                determining how to account for the accretion, the Company followed
                guidance by Staff Accounting Bulletin (“SAB”) Topic 3C Question 1, which
                the Company believes applies to its circumstances. The Company advises
                the
                Staff that upon the codification of Topic.3.C as a component of SAB
                68,
                Topic 5, “Miscellaneous Accounting”, the Staff clarified the guidance by
                noting that it applied to both redeemable and non redeemable equity
                capital. In this codification, the Staff states that “the Staff believes
                that the requirement to recognize the effective periodic cost of
                capital
                applies to nonredeemable preferred stocks because, for that purpose,
                the
                distinction between debt capital and preferred equity capital (whether
                redeemable or nonredeemable) is irrelevant from the standpoint of
                common
                stock interests.”

        Ms.
          Kate
          Tillan

        Securities
          and Exchange Commission

        June
          9,
          2006

        Page
          3

    FuelCell
      believes that it has followed GAAP in accounting for both the fair value of
      the
      Series 1 Preferred Shares at the date of the business combination as well as
      the
      subsequent accretion of the discounted cash flows implicit in that valuation.

              (2)

              Analysis
                supporting the classification of Series 1 Preferred Shares and the
                relationship to the parent
                company.

    FuelCell
      advises the staff that both the Company and the holder of the Series 1 Preferred
      Shares, Enbridge Inc. (“Enbridge”), view this security being an equity
      instrument issued by the parent company, FuelCell Energy, Inc. This is evidenced
      by the terms and characteristics of the Series 1 Preferred Shares. The party
      bearing the ultimate economic responsibility of these shares to Enbridge, is
      FuelCell and not FuelCell Energy, Ltd. Although Enbridge has a claim on the
      assets of the issuing subsidiary, FuelCell
      Energy, Ltd., Enbridge
      cannot prohibit the Company from transferring assets out of FuelCell Energy,
      Ltd. at any time, which in substance nullifies any real underlying claim to
      the
      assets of FuelCell Energy, Ltd.. The covenants or other contractual provisions
      typically protecting a preferred security holder by prohibiting an issuer from
      undertaking specified actions to the detriment of that holder are entirely
      absent from the terms and conditions of the Series I Preferred Shares.
      Accordingly, FuelCell Energy has depleted the majority of the assets previously
      held by FuelCell Energy, Ltd. as allowed by the agreement. As of October 31,
      2005 there were nominal net assets remaining in FuelCell Energy,
      Ltd.

    FuelCell
      advises the Staff that it had originally considered issuing the Series 1
      Preferred Shares at the parent company level (i.e., FuelCell). In the absence
      of
      the request made by Enbridge to issue such shares by a Canadian entity to
      provide Enbridge with certain tax advantages, the Series 1 Preferred Shares
      would have been equity issued by FuelCell, and accounted for as such.

        Ms.
          Kate
          Tillan

        Securities
          and Exchange Commission

        June
          9,
          2006

        Page
          4

    The
      Company, after consultation with its Independent Registered Public Accounting
      Firm, has considered whether the issuance of the Series 1 Preferred Shares
      out
      of the Company’s wholly-owned subsidiary. (FuelCell Energy, Ltd.) should change
      the underlying substance and accounting of this transaction. The Company has
      also considered specific accounting literature in approaching the “substance
      over form” accounting conclusion including SEC Rule 3A-02 and Concepts Statement
      #2 (“Concept #2”).

    In
      analyzing whether substance over form should dictate the accounting for this
      transaction or if the Series 1 Preferred Shares should be accounted for as
      minority interest in accordance with Rule 5-02.27, FuelCell considered several
      factors including the terms of the Series 1 security and the economic substance
      of Enbridge’s ownership interest in the consolidated company. A key
      consideration in this analysis was the fact that FuelCell Energy, Ltd. can
      be
      liquidated by FuelCell and that FuelCell can remove the assets of FuelCell
      Energy, Ltd. without any requirement for approval from the Series 1 holder.
      This
      indicates that such holder does not have a substantive ownership claim on the
      assets of the entity to which its legal ownership interest pertains. This is
      not
      consistent with what would be expected from a traditional minority interest
      holder in an entity requiring accounting in accordance with Rule
      5-02.27.

    In
      addition, the Series 1 Preferred Shares are convertible into FuelCell common
      stock. This characteristic has been included in the Series 1 Preferred Shares
      as
      a mechanism to compensate for the Series 1 holder’s lack of protection vis-à-vis
      its interest in FuelCell Energy, Ltd. and is further evidence that the Series
      1
      holder is more akin to an equity holder of FuelCell, rather than a minority
      interest holder in FuelCell Energy, Ltd., which would require accounting in
      accordance with Rule 5-02.27.

    Finally,
      FuelCell guarantees the obligations to the Series 1 Preferred shareholder.
      This
      guarantee, which has also been provided to the Series 1 holder as a mechanism
      to
      compensate for the lack of protection to the Series 1 holder with respect to
      its
      stated interest in FuelCell Energy, Ltd., indicates which entity is the ultimate
      obligor and is not consistent with the concept of a holder of minority interest
      of FuelCell Energy, Ltd.

        Ms.
          Kate
          Tillan

        Securities
          and Exchange Commission

        June
          9,
          2006

        Page
          5

    Based
      on
      the Company’s analysis and consideration of all the facts and circumstances of
      this transaction, the Company believes that presentation of the Series 1
      Preferred Shares as permanent equity of the parent is the most meaningful
      presentation of those shares to the readers of the Company’s consolidated
      financial statements and best reflects the substance of the Series 1 Preferred
      shareholder’s ownership interest in the consolidated organization.

    FuelCell
      acknowledges the following:

              -

              FuelCell
                is responsible for the adequacy and accuracy of the disclosure in
                its Form
                10-K for the year ended October 31,
                2005;

              -

              Staff
                comments or changes to disclosure in response to Staff comments do
                not
                foreclose the Commission from taking any action with respect to the
                FuelCell’s Form 10-K for the year ended October 31, 2005;
                and

              -

              FuelCell
                may not assert Staff comments as a defense in any proceeding initiated
                by
                the Commission or any person under the federal securities laws of
                the
                United States.

    Sincerely,

    /s/
      Richard A. Krantz

    Richard
      A. Krantz

    cc:
      Joseph G. Mahler