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CORRESP
1
filename1.htm

      Unassociated Document

              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

    July
      12,
      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 your letter dated June 26, 2006 to Joseph
      G.
      Mahler, Senior Vice President and Chief Financial Officer of FuelCell Energy,
      Inc. (“FuelCell” or the “Company”). The Staff’s comments have been included
      prior to the Company’s response.

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

    Financial
      Statements

    Consolidated
      Balance Sheets, page 67

    Note
      12. Shareholders’ Equity, page 85

    Staff
      Comment #1:

    Please
      tell us and disclose in future filings the significant terms of the liquidation
      preference of the Series 1 preferred shares of your subsidiary. For example,
      please clarify whether the liquidation rights relate to the parent or the
      subsidiary.

      Ms.
        Kate
        Tillan

      Securities
        and Exchange Commission

      July
        12,
        2006

      Page
        2

    FuelCell
      Response:

    The
      Company advises the Staff that in the event of the liquidation, dissolution
      or
      winding up of FuelCell Energy, Ltd., the holder of Series 1 Preferred shares
      will be entitled to receive a priority distribution of Cdn.$25,000,000 and
      any
      accrued and unpaid dividends. These liquidation obligations have been guaranteed
      to Enbridge, Inc. (“Enbridge”) by FuelCell Energy, Inc. The Company will
      disclose the liquidation preference of the Series 1 Preferred shares as
      described herein in future filings.

    Staff
      Comment #2:

    In
      order
      to facilitate our evaluation of your classification of the Series 1
      preferred shares of subsidiary as equity of the consolidated entity, please
      respond to the following comments.

            ·

              Please
                tell us how you believe the preferred shares would be presented in
                the
                separate, stand-alone financial statements of the subsidiary and
                the
                parent and to what extent you believe those presentations inform
                the
                classification in the consolidated entity financial statements and
                why.

    FuelCell
      Response:

    The
      Company believes the preferred shares should not
      be
      accounted for as equity of FuelCell Energy, Ltd. if it were to present
      stand-alone financial statements, and should be accounted for as equity of
      FuelCell Energy, Inc. in its stand-alone (i.e., parent-only) financial
      statements. The Company believes that if stand-alone financial statements were
      presented for both FuelCell Energy, Ltd. and FuelCell Energy, Inc., the
      preferred shares would be disclosed as legal-form equity issued by FuelCell
      Energy, Ltd.

    The
      Company has disclosed in its filings with the Commission that FuelCell Energy,
      Ltd. is the issuing entity and that the Series 1 Preferred Shares are legal-form
      equity of FuelCell Energy, Ltd. The Company’s substance over form conclusions
      with regard to presentation of the Series 1 Preferred Shares as equity of
      FuelCell Energy, Inc. ultimately have tried to respond to the following
      questions: (1) which entity did the Series 1 Preferred shareholder, Enbridge,
      really invest in and (2) what is the most meaningful accounting that captures
      the risks and rewards associated with the Series 1 Preferred Shares (i.e.,
      Enbridge’s investment). In substance, the combination of the Series 1 Preferred
      Shares (including their conversion feature) and the related guarantee by
      FuelCell represents a preferred equity interest in FuelCell that is (a)
      convertible into FuelCell common stock, (b) callable after July 31, 2010 and
      (c)
      mandatorily redeemable in the event of liquidation of FuelCell Energy, Ltd.
      The
      payment of dividends through a Canadian entity was to maintain the same tax
      advantages for Enbridge (in Enbridge’s view) as they had when the shares were
      issued by Global. However, in the Company’s view those features in no way
      detract from the conclusion that the Series 1 Preferred Shares are in substance
      equity of FuelCell Energy, Inc. rather than FuelCell Energy, Ltd. Accordingly,
      the Company and its Independent Registered Public Accounting Firm believe that
      the most representative accounting for this transaction is as if the Series
      1
      Preferred Shares were issued by FuelCell Energy, Inc.

      Ms.
        Kate
        Tillan

      Securities
        and Exchange Commission

      July
        12,
        2006

      Page
        3

    Staff
      Comment #2 (continued):

            ·

              Please
                discuss how you considered paragraph 254 of Statement of Financial
                Accounting Concepts (“CON”) 6 and whether you believe that the instrument
                is a minority interest as defined in that Statement. In your response,
                please evaluate both the ownership interest and residual interest
                aspects
                of that definition.

    FuelCell
      Response:

    As
      noted
      in its summary, FASB Concepts Statement No. 6, Elements
      of Financial Statements,
      defines
      10 interrelated elements of financial statements that are directly related
      to
      measuring performance and status of an entity: assets, liabilities, equity
      or
      net assets, investments by owners, distributions to owners, comprehensive
      income, revenues, expenses, gains, and losses. CON 6 also defines 3 classes
      of
      net assets of not-for-profit organizations and the changes in those classes
      during a period. In addition, CON 6 defines or discusses other concepts, terms,
      or phrases that are used in the definitions or explanations or that are
      otherwise related to those elements and classes. There is an index at the end
      of
      CON 6 that identifies the paragraphs in which those elements and classes and
      certain other significant concepts, terms, or phrases are defined or discussed.
      The terms “minority interest” and “minority interests” are not contained in
      those definitions and are not otherwise defined by CON 6. The reference to
      “minority interests” in paragraph 254 of CON 6 is in a section entitled
“Examples to Illustrate Concepts,” which begins in paragraph 229. Paragraph 231
      contains the observation that “None of the examples involves investments by
      owners or distributions to owners, and only the last one involves equity…” The
      last example to which the comment in paragraph 231 refers is the example in
      paragraph 254 involving minority interests and stock purchase warrants.
      Paragraph 254 describes why both minority interests and stock purchase warrants
      lack the characteristics of liabilities, but it does not provide guidance about
      how to determine that a residual interest is a minority interest rather than
      equity of a consolidated entity.

      Ms.
        Kate
        Tillan

      Securities
        and Exchange Commission

      July
        12,
        2006

      Page
        4

    Paragraph
      20 of FASB Statement No. 94, Consolidation
      of All Majority-Owned Subsidiaries,
      describes the fact that noncontrolling (minority) interests arise because
      subsidiaries are only partially owned. In that regard, paragraph 5 of FASB
      Statement No. 141, Business
      Combinations,
      describes minority interests as noncontrolling equity interests of a subsidiary.
      The Company believes that it is well established in practice and well understood
      within the context of ARB 51, APB 16, FAS 94, and FAS 141 that minority interest
      refers to the GAAP equity (i.e., residual interest) of a consolidated subsidiary
      that is not owned by the subsidiary’s parent. Minority interest would not arise,
      for example, from legal form equity of a subsidiary that is not equity under
      GAAP. The Company has acknowledged in prior responses to the Staff that GAAP
      requires preferred stock of a subsidiary to be accounted for as a minority
      interest if it is considered equity of the subsidiary for GAAP purposes and
      is
      not owned by the parent company. The Company notes that the Series 1 Preferred
      Shares have characteristics that are consistent with the characteristics of
      residual interests described in paragraph 254 of CON 6. The Company, however,
      does not believe its accounting is inconsistent with that paragraph or with
      established practice regarding minority interests within the context of ARB
      51,
      APB 16, FAS 94, and FAS 141 because the underlying entity in which the Series
      1
      Preferred Shares have a substantive residual interest is actually FuelCell
      Energy, Inc. rather than FuelCell Energy, Ltd. The Series 1 Preferred Shares’
underlying ownership interest is in FuelCell Energy, Inc. because such shares
      are convertible into FuelCell Energy, Inc. common stock, are guaranteed by
      FuelCell Energy, Inc. and because FuelCell Energy, Inc. has the ability to
      transfer the assets of FuelCell Energy, Ltd. to FuelCell without prior approval
      from the Series 1 Preferred shareholder and, therefore, the Series 1 Preferred
      shareholder is not able to derive any substantive economic benefit from the

      assets of FuelCell Energy, Ltd.

    Staff
      Comment #2 (continued):

            ·

              If
                the preferred shares meet the CON 6, paragraph 254 definition of
                minority
                interest, please discuss how you reconciled your current presentation
                of
                those shares as equity in the parent's consolidated financial statements
                with the parent company approach to consolidation under U.S. GAAP.
                In your
                response, please help us understand whether the effect of your
                presentation is that you are following an entity approach to consolidation
                and, if so, whether you believe as a general matter the entity approach
                is
                a permissible approach to consolidation under U.S.
                GAAP.

      Ms.
        Kate
        Tillan

      Securities
        and Exchange Commission

      July
        12,
        2006

      Page
        5

    FuelCell
      Response:

    As
      discussed above, the Company believes the ownership and residual interests
      maintained by the holder of the Series 1 Preferred Shares in substance relate
      to
      FuelCell Energy, Inc., and would be presented as such if stand-alone financial
      statements of either FuelCell Energy, Ltd. or FuelCell Energy, Inc. were
      presented, which is why such shares are presented as equity in the Company’s
      consolidated financial statements. The Company is not applying the entity theory
      of consolidation, but observes that the FASB has concluded in the second phase
      of its overall project on business combinations (its joint project with the
      IASB) that the single economic entity approach to consolidation is conceptually
      superior to the parent company approach. The Company has acknowledged that
      accounting for the Series 1 Preferred Shares as equity in the consolidated
      financial statements based on their substance differs from the minority interest
      classification that would be applicable for those shares if the accounting
      followed the legal form of the issuance. The Company believes that the substance
      of the transaction is that Enbridge is investing in FuelCell Energy, Inc. and
      not FuelCell Energy, Ltd.

    Staff
      Comment #2 (continued):

            ·

              Please
                tell us how you considered the substantive business purposes of setting
                up
                the Canadian subsidiary and issuing preferred shares of that subsidiary
                in
                your analysis or the appropriate accounting for the preferred shares.
                That
                is, tell us why you believe it is inappropriate to present legal
                form
                equity issued by an entity for a substantive business purpose as
                equity of
                that entity.

    FuelCell
      Response:

    The
      Company does not believe Enbridge’s request to issue the Series 1 Preferred
      Shares out of a Canadian entity represented a substantive aspect of the
      structure to affect the Series 1 Preferred issuance and should not necessarily
      by itself dictate the accounting for this transaction. The Company analyzed
      all
      of the terms and characteristics of the Series 1 Preferred Shares, which have
      been discussed within the context of its substance over form argument in
      previous responses, and concluded that the substance of this transaction is
      that
      Enbridge is investing in FuelCell Energy, Inc., notwithstanding their tax
      strategy to obtain preferential tax treatment by continuing to receive dividends
      on securities from a Canadian entity.

    In
      assessing the impact of Enbridge’s tax strategy on the accounting for the Series
      1 Preferred Shares for purposes of responding to the Staff’s comments, the
      Company considered the guidance regarding commercial substance in FASB Statement
      (“FAS”) No. 153, Exchanges
      of Nonmonetary Assets.
      The
      Company acknowledges that the Series 1 Preferred Shares are not within the
      scope
      of FAS 153. However, the Company believes the amendment to APB Opinion No.
      29,
Accounting
      for Nonmonetary Transactions,
      in
      paragraph 2(d) of FAS 153 is instructive regarding the FASB’s view of the
      financial reporting impact of tax strategies that are achieved solely because
      the tax business purpose is based on achieving a specified financial reporting
      result. Specifically, paragraph 21A of APB 29, which was added by paragraph
      2(d)
      of FAS 153, states that “In assessing the commercial substance of an exchange,
      tax cash flows that arise solely because the tax business purpose is based
      on
      achieving a specified financial reporting result shall not be considered.”
Paragraph A13 of FAS 153 describes the FASB’s thinking in providing this
      guidance as follows:

      Ms.
        Kate
        Tillan

      Securities
        and Exchange Commission

      July
        12,
        2006

      Page
        6

    The
      Board
      under