SecProbe.io

CORRESP
1
filename1.htm

Correspondence

    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

March 12, 2009

Mr. Brian Cascio

Accounting Branch Chief

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, 2008

    Filed January 14, 2009

    File No. 001-14204

Dear Mr. Cascio:

This correspondence is in response to your letter dated February 25, 2009 to Joseph G. Mahler,
Senior Vice-President and Chief Financial Officer of FuelCell Energy, Inc. (“FuelCell” or the
“Company”). In that letter, you requested that FuelCell respond to your comments following a
review of its 2008 Annual Report on Form 10-K filed on January 14, 2009. We will respond to the
comments in the order presented.

For the Staff’s reference, we have included and highlighted, in this letter, the original Staff
comment which is followed by FuelCell’s response. Where applicable, the Company has incorporated
responses into its Form 10-Q filing for the quarter ended January 31, 2009.

Form 10-K for the year ended October 31, 2008

Item 1. Business, page 6

Strategic Alliances and Market Development Agreements, page 14

Mr. Brian Cascio

Securities and Exchange Commission

March 12, 2009

Page 2

1. Please provide us with your analysis as to why you do not need to file the manufacturing and
distribution agreement with POSCO and the market development agreement with Enbridge, referenced in
this section, as exhibits to your filing.

FuelCell Response:

The Company views its manufacturing and development agreement with POSCO Power and our
manufacturing and distribution agreement with Enbridge, Inc. as ordinary course of business
contracts. The Company has similar agreements with a number of our other distributors and
manufacturers and those contracts contain terms and provisions similar to those found in agreements
with POSCO Power and Enbridge.

Notwithstanding the above, the Company advises that since executing the manufacturing and
development agreement (titled the Alliance Agreement) with POSCO Power on February 7, 2007 the
Company has become substantially more dependent on POSCO Power as a significant customer, and
particularly during fiscal year 2008. Accordingly, the Company has filed the Alliance agreement,
and the associatd Technology Transfer, License and Distribution Agreement, as Exhibits to the 10-Q
for the period ended January 31, 2009.

The Company is not substantially dependent on Enbridge and has concluded that it did not need to
file this agreement.

2. We note the disclosure on page 29 of your risk factors relating to your top two customers. In
future descriptions of your business, please provide clear disclosure regarding your principal
customers, including the names of such customers, as required by Item 101(c)(vii) of Regulation
S-K.

FuelCell Response:

The Company acknowledges the Staff’s comment with regard to the following requirement of Item
101(c) (vii) of Regulation S-K “The name of any customer and its relationship, if any, with the
registrant or its subsidiaries shall be disclosed if sales to the customer by one or more segments
are made in an aggregate amount equal to 10 percent or more of the registrant’s consolidated
revenues and the loss of such
customer would have a material adverse effect on the registrant and its subsidiaries taken as a
whole.”

Mr. Brian Cascio

Securities and Exchange Commission

March 12, 2009

Page 3

In future filings where Item 101(c) (vii) is applicable, the Company will incorporate the names and
relationships of significant customers. In addition, the Company has included the following
disclosures under Product Sales and Revenues in Management, Discussion and Analysis in the 10-Q
filing for the period ended January 31, 2009:

POSCO Power, one of our strategic distribution partners, accounted for approximately 72
percent and 48 percent of total product sales and revenues for the periods ended January
31, 2009 and 2008, respectively.  In 2007, we entered into a 10-year manufacturing and
distribution agreement with POSCO Power at which time it invested in FuelCell Energy, Inc.
and is currently a 5.5 percent owner of the Company’s common stock.

Item 2. Properties, page 38

3. We note your disclosure of a lease relating to a 38,000 square foot property in Danbury. Please
provide us with your analysis as to why you do not need to file this lease as an exhibit to your
filing. Refer to Item 601(b)(l0)(ii)(D) of Regulation S-K.

FuelCell Response:

FuelCell advises the Staff that the 38,000 square foot property in Danbury is not considered a
material lease as a primary purpose for the lease is warehousing of inventory. The Company will
clarify the business use of said property in Item 2 of future 10-K filings. Annual rent expense is
approximately $0.2 million for this facility which is not material to the results of operations.

FuelCell has filed a lease agreement for its Torrington manufacturing facility (referenced as
Exhibit 10.55 in its 10-K filing for fiscal year 2008) which is considered material to the
Company’s operation.

Commitments and Significant Contractual Obligations, page 62

4. We see that you have a total liability for unrecognized tax benefits at October 31, 2008 of
$15.7 million. Please revise future filings to include the liability within
the contractual obligations table to the extent that you can make reasonably reliable estimates of
the amount and timing of cash settlements. Otherwise, these amounts should be included within a
footnote to the table or within an “other” category along with the bases for the exclusion. Refer
to Item 303(a)(5)of Regulation S-K.

Mr. Brian Cascio

Securities and Exchange Commission

March 12, 2009

Page 4

FuelCell Response:

FuelCell adopted FIN 48 as of November 1, 2007. In connection with the adoption of FIN 48, the
Company identified uncertain tax positions aggregating $15.7 million and reduced its net operating
loss carryforwards (NOL’s) by this amount. At October 31, 2008, the Company had available for
federal and state income tax purposes, NOL’s of approximately $448 million and $343 million,
respectively. Because of the level of NOL’s and valuation allowances, unrecognized tax benefits,
even if not resolved in the Company’s favor, would not result in any cash payment or obligation.
Accordingly, the Company did not identify this item in the Commitments and Significant Contractual
Obligation table or footnotes. Given the Company’s tax position, this balance is accordingly not
reflected on the Company’s consolidated balance sheet. The Company has included additional
disclosure under the Commitments and Significant Contractual Obligations table regarding the $15.7
million total liability for unrecognized tax benefits in its 10-Q filing for the quarter ended
January 31, 2009.

Management’s Discussion and Analysis – Revenues and Costs of revenues, page 54

5. We note that cost of product sales and revenues significantly exceeds revenues each period.
Please further discuss the reason that costs significantly exceed revenues each period, whether you
expect this trend to continue and your efforts to address this trend in future periods.

FuelCell Response:

The Company acknowledges the comment and advises that it will include additional disclosure under
the heading Product Sales and Revenues in future filings as to reasons why costs exceeded revenues
and expected trends. In the 10-Q filed for the period ended January 31, 2009, the Company has
included the following:

The Company has historically sold its fuel cell products below cost while the market
develops and product costs are reduced. We have been engaged in a formal
commercial cost-out program since 2003 to reduce the total life cycle costs of our power
plants.  We have made significant progress primarily through value engineering our
products, manufacturing process improvements and higher production levels, technology
improvements, and global sourcing.

Mr. Brian Cascio

Securities and Exchange Commission

March 12, 2009

Page 5

We currently estimate that product sales and revenues will be gross margin profitable when
the Company achieves production volumes in the 35 to 70 MW range depending on product mix.
Our current annualized production volume is approximately 30 MW. As a measure of cost
reduction progress prior to achieving positive margins, the Company calculates a
cost-to-revenue ratio which is cost divided by revenue. Refer also to the liquidity and
capital resources section of this document for discussion of the Company’s plans for
implementing our cost reduction efforts and increasing annual order volume.

FuelCell will add additional disclosure under “Results of Operations” in the Company’s 10-Q filing.
In this disclosure, the Company will also refer readers to the liquidity and capital resources
section of this document for future discussion of the Company’s plans for implementing our cost
reduction efforts and increasing annual order volume.

Consolidated Statements of Cash Flows, page 73

6. We see that you present ending cash, cash equivalents and investment in U.S. Treasuries. Please
tell us how this measure complies with paragraph 7 of SFAS 95 which states that the total amounts
of cash and cash equivalents at the beginning and end of the period shown in the statement of cash
flows shall be the same amounts as similarly titled line items or subtotals shown in the statements
of financial position as of those dates.

FuelCell Response:

The Company acknowledges the Staff’s comment. The Company’s statement of cash flows does present
the total amounts of cash and cash equivalents at the beginning and end of the period and such
amounts do agree to similarly titled line items on the consolidated balance sheets as of those
dates. As supplemental information, the Company also provided information on short-term and
long-term U.S. treasury securities below the ending cash and cash equivalents amount on the
statement of cash flows. FuelCell believes that this supplemental information is important
disclosure as the Company uses its investments in U.S. Treasuries to fund operations.

Mr. Brian Cascio

Securities and Exchange Commission

March 12, 2009

Page 6

In future filings, including the 10-Q filed for the quarter ended January 31, 2009, the Company
will remove the supplemental disclosure on U.S. treasury securities and only provide ending cash
and cash equivalents on the statement of cash flows.

7. We see from page 82 that you received $1.8 million in cash proceeds from the sale of a power
plant to the Sierra Nevada Brewing Co. during fiscal year 2007. Please tell us why the cash
proceeds are not presented as cash provided by an investing activity in the statement of cash
flows.

FuelCell Response:

FuelCell advises the Staff that the proceeds of the sale of the power plant were included as an
operating activity in the results of operations and the statement of cash flows as sales of power
plants are the Company’s primary business. The customer elected to exercise a contract option to
purchase the power plant from the Company rather than continuing with a power purchase agreement.
The Company noted this in Note 17. Supplemental Cash Flow Information. Had this sale been of an
asset not core to its product line offerings, the Company would have presented cash proceeds as an
investing activity.

Note 1. Summary of Significant Accounting Policies, page 74

Nature of Business, page 74

8. With a view toward disclosure, please revise future filings to clarify which of your
subsidiaries are wholly owned and which subsidiaries are majority owned.

FuelCell Response:

The Company acknowledges the Staff’s comment and, in future filings that include this disclosure,
will clearly identify those subsidiaries that are wholly owned and those that are majority owned.

Mr. Brian Cascio

Securities and Exchange Commission

March 12, 2009

Page 7

Warranty Costs, page 77

9. We reference the disclosure that due to limited operating experience, warranty costs are
currently expensed as incurred. Since costs can not be estimated, please tell us why you should not
defer revenue recognition until either a reliable estimate of the costs can be made or the
obligation period expires. We refer you to Question 3 of SAB Topic 13A(b).

FuelCell Response:

The Company advises the Staff that the power plant product warranty period is for a limited period
of time (typically 12 to 18 months). During the warranty period on product sale contracts, warranty
expense incurred by the Company has been and continues to be immaterial compared to total sales and
revenues as demonstrated in the table below.

    Fiscal 2008

    Fiscal 2007

    % of

    % of

    Product

    Product

    Warranty

    Sales and

    Warranty

    Sales and

$’s
in 000’s     Product Line

    Expense

    Revenues

    Expense

    Revenues

    DFC 300 Product Line

    $
    213

    0.3
    %

    $
    625

    1.9
    %

    DFC 1500 Product Line

    $
    12

    0.0
    %

    $
    4

    0.0
    %

    DFC 3000 Product Line

    $
    —

    0
    %

    $
    —

    0
    %

FuelCell will add disclosure in future filings as applicable that actual incurred warranty expenses
have historically been immaterial during the contractual warranty period. As the Company continues
to gain experience with its recently developed products, the Company will continue to evaluate its
warranty reserve estimates.

Note 5. Accounts Receivable, page 81

10. We see that the majority of your accounts receivable is due to unbilled recoverable costs from
long-term contracts. Please revise future filings to include the disclosures required by Rule 5-02
(3)(c) of Regulation S-X.

Mr. Brian Cascio

Securities and Exchange Commission

March 12, 2009

Page 8

FuelCell Response:

The Company acknowledges the Staff’s comments regarding the following requirements of Rule
5-02(3)(c):

“If receivables include amounts due under long-term contracts state separately in the balance sheet
or in a note to the financial statements the following amount:

    (1)

    Balances billed but not paid by customers under retainage provisions in
contracts.

    (2)

    Amounts representing the recognized sales value of performance and such amounts
that had not been billed and were not billable to customers at the date of the balance
sheet. Include a general description of the prerequisites for billing.

    (3)

    Billed or unbilled amounts representing claims or other similar items subject to
uncertainty concerning their determination or ultimate realization. Include a
description of the nature and status of the principal items comprising such amount.

    (4)

    With respect to (1) through (3) above, also state the amounts included in each
item which are expected to be collected after one year. Also state, by year, if
practicable, when the amounts of retainage are expected to be collected.”

Mr. Brian Cascio

Securities and Exchange Commission

March 12, 2009

Page 9

The
Company has complied with the requirements of the rule and has included the following disclosure in its 10-Q for the quarter ended January 31,
2009:

Note 4. Accounts Receivable

Accounts receivable at January 31, 2009 and October 31, 2008 consisted of the following:

    January 31,

    October 31,

    2009

    2008

    U.S. Government:

    Amount billed

    $
    260

    $
    199

    Unbilled recoverable costs

    825

    406

    1,085

    605

    Commercial Customers:

    Amount billed(1)

    22,414

    4,584

    Unbilled recoverable costs

    6,877

    10,907

    29,291

    15,491

    $
    30,376

    $
    16,096

    (