The following discussion should be read in conjunction with information included in Item 8 of this report. Unless otherwise indicated, the terms "Company", "FuelCell Energy", "we", "us", and "our" refer to FuelCell Energy Inc. and its subsidiaries. All tabular dollar amounts are in thousands.
In addition to historical information, this discussion and analysis contains forward-looking statements. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Factors that could cause such a difference include, without limitation, the risk that commercial field trials of our products will not occur when anticipated, general risks associated with product development and manufacturing, changes in the utility regulatory environment, potential volatility of energy prices, rapid technological change, competition, market acceptance of our products and our ability to achieve our sales plans and cost reduction targets, as well as other risks set forth in our filings with the Securities and Exchange Commission including those set forth under Item 1A - Risk Factors in this report.
Overview and Recent Developments
Overview
We are a leading integrated fuel cell company with a growing global presence. We design, manufacture, sell, install, operate and service ultra-clean, highly efficient stationary fuel cell power plants for distributed baseload power generation. Our power plants offer scalable on-site power and utility grid support, helping customers solve their energy, environmental and business challenges.
Global urban populations are expanding, becoming more industrialized and requiring greater amounts of power to sustain their growth. As policymakers and power producers struggle to find economical and readily available solutions that will alleviate the impact of harmful pollutants and emissions, the market for ultra-clean, efficient and reliable distributed generation is rapidly growing. With fully commercialized ultra-clean fuel cell power plants and decades of experience in the industry, we are well positioned to grow our installed base of power plants. Our plants are operating in more than 50 locations worldwide and have generated more than 1.5 billion kilowatt hours (kWh) of electricity, which is equivalent to powering more than 135,000 average size U.S. homes for one year. Our installed base and steadily growing backlog exceeds 300 megawatts (MW).
Our diverse and growing customer base includes major electric utility companies, municipalities, universities, government entities and businesses in a variety of commercial and industrial enterprises. Our leading geographic markets are South Korea and the United States and we are actively pursuing expanding opportunities in Asia, Europe and Canada.
We service the power plants for virtually every customer we have globally under long term service agreements. We monitor and operate the power plants around the clock from our technical assistance center located at our Danbury, Connecticut headquarters. We have an extensive service network of FuelCell Energy technicians that provide on-site service and maintenance. Recent Developments
The Company executed a number of key initiatives during and subsequent to fiscal year 2012 that expanded the global manufacturing footprint and began development of the European market for fuel cell power plants. Versa Power Systems, Inc. acquisition
In December 2012, the Company acquired the remaining 61% ownership position of Versa Power Systems, Inc. (Versa), a leading global developer of solid oxide fuel cell technology (SOFC). The Versa SOFC technology is incorporated in programs involving a broad range of leading global companies including the Boeing Company. The potential market opportunity for the SOFC technology is with sub-megawatt applications for customers that need on-site power generation in either combined heat and power or electric-only configurations. The DFC® product line utilizes carbonate technology and is well-suited for the megawatt class market as the technology and the economics scale very well with greater size. SOFC technology is complementary and will target adjacent market opportunities in the sub-megawatt market, such as commercial buildings and high rise residential complexes. FuelCell Energy is currently in discussion with several potential global partners to commercialize the SOFC technology.

The transaction resulted in the Company exchanging approximately 3.5 million shares of its common stock for the remaining 61% of outstanding Versa shares held by the four Versa shareholders. The purchase price offered, which was made prior to

year-end, by FuelCell Energy resulted in an impairment charge of the Company's prior investment classified as Investment in and loans to affiliate on the Consolidated Balance Sheets and recorded in the fourth quarter of 2012.

Versa will be fully consolidated into the Company's financial statements as of the acquisition date. Versa receives revenue under a number of research contracts including the U.S. Department of Energy Solid State Energy Conversion Alliance (SECA) coal-based systems program and a research contract with The Boeing Company. Revenue and associated costs are expected to be recognized under Research and development contracts in the consolidated financial statements of FuelCell Energy, Inc.

Bridgeport Project

In December 2012, the Company announced the sale of a 14.9 MW fuel cell park in Bridgeport, Connecticut with the power plants sold to Dominion, one of the largest utilities in the USA with operations in 15 States. Five 2.8 MW DFC3000® power plants will supply 14.0 megawatts of ultra-clean electricity and heat from the fuel cells will be converted into an additional 0.9 MW of virtually emission free electricity through use of an organic rankine cycle configuration. Connecticut Light & Power will purchase the electricity from Dominion under a 15 year energy purchase agreement. Fuel cell parks assist utilities in adding environmentally friendly and economical baseload power generation throughout their service area, reducing congestion of their existing transmission and distribution grid. This project will increase product and service backlog in the first quarter of 2013 by approximately $125 million, including approximately $56 million for product backlog and $69 million for service backlog.

Korean Market Developments
During the fourth quarter of 2012, the Company announced an order from its South Korean partner, POSCO Energy Inc. LTD. (POSCO) for 121.8 megawatts (MW) of fuel cell kits and services to be manufactured at the FuelCell Energy production facility in Torrington, Connecticut. The estimated value of the multi-year contract is approximately $181 million. South Korea adopted an ambitious renewable portfolio standard (RPS) in 2012 to promote clean energy, reduce carbon emissions, and develop a local green-industry to support economic growth. Utilities and project investors are developing new and renewable power projects under the RPS including a new 58.8 MW fuel cell park that is in progress with construction expected to commence in 2012. The ownership of the 58.8 MW fuel cell park includes Korea Hydro and Nuclear Power Co. Ltd., Samchully Co., a gas distribution company, POSCO and financial investors. The electricity will be sold to the power grid and the heat from the fuel cells will be supplied to a district heating system. The first delivery will occur in May 2013 to ensure an uninterrupted supply of kits as deliveries under the existing 70 MW order will conclude in April 2013. Each kit consists of 1.4 MW of fuel cell components that are interchangeable and can be used for megawatt class fuel cell power plants or sub-megawatt plants.
Also during the fourth quarter of 2012, the Company announced the execution of a series of strategic initiatives with POSCO to expand the market for stationary fuel cell power plants in Asia, including a license agreement for POSCO to manufacture Direct FuelCell (DFC) power plants in South Korea and sell throughout Asia. The Cell Technology Transfer and License Agreement provides POSCO the rights to manufacture carbonate fuel cell components in South Korea based on DFC technology and grants commercial rights to Asian markets. The agreement harmonizes two prior license agreements so that POSCO has rights to manufacture the entire carbonate DFC power plant. The License Agreement payments total $18 million and the amendment to prior agreements payments total $8 million. The initial payment of $10 million was received on November 1, 2012. POSCO will also pay a 3.0 percent royalty to the Company for each power plant built and sold by POSCO during the next 15 years. This royalty is expected to develop into a consistent and growing revenue stream as the Asian fuel cell market expands. The license agreement may be extended for two additional terms of five years each by mutual agreement.
This relationship with POSCO illustrates our strategy of executing locally for economic development, while leveraging our global expertise and infrastructure. An integrated global supply chain is closely managed by FuelCell Energy and will be used for supplying both the new POSCO facility in Pohang, South Korea as well as the FuelCell Energy production facility. Greater purchasing volume and consistent production levels help to reduce product costs. Local capacity in South Korea provides a second source of supply for DFC fuel cell stacks, which is valued by some prospective customers and project investors should a supply disruption occur at the FuelCell Energy production facility in Connecticut, USA. Locating final assembly of our DFC power plants closer to end users reduces costs and ensures our products meet the needs of individual markets. POSCO fulfills South Korean energy policy objectives and creates local employment. POSCO is also marketing power plants regionally, beginning with markets in Indonesia.

European Market Developments
In fiscal year 2012, a partnership was formed with German-based Fraunhofer IKTS that subsequently led to the formation of a joint venture, FuelCell Energy Solutions, GmbH. FuelCell Energy Solutions is a German-based joint venture that is 75 percent owned by FuelCell Energy, Inc. and 25 percent owned by Fraunhofer IKTS.
Fraunhofer IKTS, with its staff of approximately 400 engineers, scientists and technicians, is a world leading institute in the field of advanced ceramics for high tech applications, including fuel cells. The parent organization, Fraunhofer, was founded in 1949 and is Europe's largest application-oriented research organization with an annual research budget of €1.8 billion (approximately $2.3 billion) and more than 18,000 staff, primarily scientists and engineers. Fraunhofer has research centers and representative offices in Europe, USA, Asia and the Middle East, and more than 80 research units, including 60 Fraunhofer Institutes, at different locations in Germany. Fraunhofer IKTS has proprietary carbonate fuel cell technology and patents that has been contributed to FuelCell Energy Solutions, GmbH (FCES), the German-based joint venture that is 75 percent owned by FuelCell Energy, Inc. and 25 percent by Fraunhofer IKTS. In addition, Fraunhofer IKTS is contributing their expertise and extensive research and development capabilities with fuel cells and materials science as well as sharing their industry and government relationships. Within six months of the initial partnership announcement between FuelCell Energy, inc. and Fraunhofer IKTS, the first sale was announced by FCES for the installation of a DFC power plant at the new Federal Ministry of Education and Research government complex in Berlin, Germany.
FCES is consolidated in the financial statements of the Company, including the related noncontrolling interest.
Common Stock Sales
On March 27, 2012, the Company completed a public offering of 23.0 million shares of common stock including 3.0 million shares sold pursuant to the full exercise of an over-allotment option previously granted to the underwriters. All shares were offered by the Company at a price of $1.50 per share. Total net proceeds to the Company were approximately $32.0 million.
On April 30, 2012, the Company completed a $30 million investment by POSCO. Under the terms of the agreement, POSCO purchased 20.0 million shares of common stock at a price of $1.50 per share for proceeds of $30 million. These proceeds were received on May 3, 2012. This investment brings POSCO's common stock ownership percentage in the Company to approximately 16%.

Results of Operations Management evaluates the results of operations and cash flows using a variety of key performance indicators including revenues compared to prior periods and internal forecasts, costs of our products and results of our "cost-out" initiatives, and operating cash use. These are discussed throughout the 'Results of Operations' and 'Liquidity and Capital Resources' sections.
Results of Operations are presented in accordance with accounting principles generally accepted in the United States ("GAAP") and as adjusted for certain items referenced below. Management also uses non-GAAP measures which exclude non-recurring items in order to measure operating periodic performance. Adjustments to GAAP are referenced below under "Revenues and Costs of Revenues" and "Net Loss to Common Shareholders". We have added this information because we believe it helps in understanding the results of our operations on a comparative basis. This adjusted information supplements and is not intended to replace performance measures required by U.S. GAAP disclosure.
Comparison of the Years Ended October 31, 2012 and October 31, 2011 Revenues and Costs of revenues
Our revenues and cost of revenues for the years ended October 31, 2012 and 2011 were as follows:

                                              Years Ended
                                              October 31,                 Change
                                           2012         2011            $          %
Total revenues                          $ 120,603    $ 122,570     $  (1,967 )     (2 )

Total cost of revenues                  $ 120,158    $ 135,180     $ (15,022 )    (11 )

Total gross profit (loss)               $     445    $ (12,610 )   $  13,055     (104 )

Total Sales Cost-to-revenue ratio (1)        1.00         1.10                     (9 )

(1) Cost-to-revenue ratio is calculated as total cost of revenues divided by total revenues.

Total revenues for the year ended October 31, 2012 decreased $2.0 million, or 2 percent, to $120.6 million from $122.6 million during the same period last year. Total cost of revenues for the year ended October 31, 2012 decreased by $15.0 million, or 11 percent, to $120.2 million from $135.2 million during the same period last year. A discussion of the changes in product sales and service agreement revenues and research and development contract revenues follows.

Product sales and service agreement revenues Our product sales and service agreement revenues and cost of revenues for the years ended October 31, 2012 and 2011 were as follows:

                                                 Years Ended
                                                 October 31,                    Change
                                             2012           2011            $             %
Revenues:
Product sales                            $   94,950     $  103,007     $   (8,057 )         (8 )
Service agreement revenues                   18,183         12,097          6,086           50
Total                                    $  113,133     $  115,104     $   (1,971 )         (2 )
Cost of Revenues:
Product sales                            $   93,876     $   96,525     $   (2,649 )         (3 )
Service agreement revenues                   19,045         30,825        (11,780 )        (38 )
Total                                    $  112,921     $  127,350     $  (14,429 )        (11 )
Gross profit (loss):
Gross profit (loss) from product sales   $    1,074     $    6,482     $   (5,408 )          -
Gross loss from service agreement
revenues                                       (862 )      (18,728 )       17,866          (95 )
Total                                    $      212     $  (12,246 )   $   12,458         (102 )
    Product sales cost-to-revenue
ratio (1)                                      0.99           0.94                           5
       Service agreement revenues
      cost-to-revenue ratio (1)                1.05           2.55                         (59 )

(1) Cost-to-revenue ratio is calculated as cost of sales and revenues divided by sales and revenues.

Product sales and service agreement revenues decreased $2.0 million, or 2 percent, in the fiscal year ended October 31, 2012 to $113.1 million compared to $115.1 million for the prior year period. Cost of product sales and service agreement revenues decreased $14.4 million, or 11 percent in fiscal year ended October 31, 2012 to $112.9 million compared to $127.4 million in the same period the prior year. This decrease is primarily due to continued focus on reducing product costs and enhancing manufacturing processes and efficiencies. The decrease is also partially a result of a B1200 repair and upgrade program charge recorded in fiscal 2011 totaling $8.3 million. Also, fiscal 2011 cost of sales reflects a benefit of approximately $1.0 million from a vendor settlement related to certain prior period issues associated with components purchased from this vendor.
Gross profit for product sales and service agreement revenues is $0.2 million, compared to a gross loss of $12.2 million in fiscal 2011. The cost-to-revenue ratio was .99-to-1.00 for fiscal year ended October 31, 2012 compared to 1.11-to-1.00 for fiscal year ended October 31, 2011 (1.03-to-1.00 excluding the $8.3 million B1200 repair and upgrade charge). Excluding the $8.3 million B1200 repair and upgrade charge in fiscal year ended October 31, 2011, the year-over year improvement is a result of continued focus on reducing product costs, enhancing manufacturing processes and efficiencies, and improving the financial profile of the service business.
Product Sales and Cost of Sales
Product sales and revenues for fiscal year ended October 31, 2012 included $77.0 million from the sale of power plants, fuel cell kits, fuel cell modules, and other fuel cell power plant components and $18.0 million of revenue primarily from the design and delivery of capital equipment to POSCO for their fuel cell module assembly facility as well as construction and installation services. This compared to product sales and revenues in fiscal 2011 which included $88.0 million from the sale of power plants, fuel cell kits, fuel cell modules, and other fuel cell power plant components and $15.0 million of revenue primarily from the design and delivery of capital equipment to POSCO for their fuel cell module assembly facility as well as construction and installation services.
Cost of product sales decreased $2.6 million in fiscal year ended October 31, 2012 to $93.9 million, compared to $96.5 million in the same period the prior year. Gross profit decreased $5.4 million to $1.1 million in fiscal 2012 compared to $6.5 million in fiscal 2011 on a mix primarily consisting of fuel cell kits in fiscal 2012 compared to a higher volume of revenue from complete power plants in fiscal 2011 which had higher margins. As of October 31, 2012 our production run-rate was 56 MW.

Service Agreement Revenues and Cost of Revenues Service agreement revenues for fiscal year ended October 31, 2012 totaled $18.1 million from service and power purchase agreements, compared to $12.1 million for fiscal 2011, on an increased number of service agreements as the Company's number of units in the field continues to grow. Service agreement cost of revenues decreased to $19.0 million from $30.8 million in fiscal 2011. The gross loss on service agreements decreased to $0.9 million for fiscal year ended October 31, 2012, compared to $18.7 million for the comparable prior year period. The improvement in service agreement margins is primarily due to lower stack replacement and routine maintenance costs and increased revenues on new MW class product installations. The loss on service agreements has historically been due to high maintenance, stack replacement and other costs on older and sub-MW product designs. As profitable megawatt-class service agreements are executed and as early generation sub-megawatt products are retired or become a smaller overall percentage of the installed fleet, we expect the loss on service agreements to continue to decline. Fiscal 2011 also includes a B1200 repair and upgrade program charge totaling $8.3 million.

Cost of product sales includes costs to design, engineer, manufacture and ship our power plants and power plant components to customers, site engineering and construction costs where we are responsible for power plant system installation, costs for stack module assembly and conditioning equipment sold to POSCO, warranty expense, liquidated damages and inventory excess and obsolescence charges. Cost of service agreements include maintenance and stack replacement costs to service power plants for customers with long-term service agreements and operating costs for our units under PPA's.
We contract with a concentrated number of customers for the sale of our products and for research and development contracts. Refer to Note 1 of notes to consolidated financial statements for more information on customer concentrations.
There can be no assurance that we will continue to achieve historical levels of sales of our products to our largest customers. Even though our customer base is expected to increase and our revenue streams to diversify, a substantial portion of net revenues could continue to depend on sales to a concentrated number of customers. Our agreements with these customers may be canceled if we fail to meet certain product specifications or materially breach the agreements, and our customers may seek to renegotiate the terms of current agreements or renewals. The loss of, or reduction in sales to, one or more of our larger customers, could have a material adverse effect on our business, financial condition and results of operations.
Research and development contracts
Research and development contracts revenue is derived primarily (greater than 90 percent) from the DOE and other governmental agencies. Research and development contracts revenue and related costs for the fiscal years ended October 31, 2012 and 2011 were as follows:

                                                 Years Ended
                                                 October 31,         Percentage
                                               2012       2011         change
Research and development contracts           $ 7,470    $ 7,466           -  %
Cost of research and development contracts     7,237      7,830          (8 )%
Gross profit (loss)                          $   233    $  (364 )      (164 )%

Research and development contracts revenue for fiscal year 2012 was $7.5 million, unchanged when compared to fiscal year 2011. Cost of research and development contracts decreased $0.6 million to $7.2 million during fiscal 2012, compared to $7.8 million for 2011. Gross profit (loss) from research and development contracts for 2011 was $0.2 million or 3 percent, compared to ($0.4 million) or (5 percent) in 2011. The increase in margins is due to the mix of cost share on contracts with activity during the period. Administrative and selling expenses
Administrative and selling expenses were $18.2 million for the fiscal year ended October 31, 2012 compared to $16.3 million during fiscal 2011. Administrative and selling increased as a result of higher market development expenditures for a number of power plant projects and expenditures incurred for additional operations in Europe.

Research and development expenses
Research and development expenses decreased $2.4 million to $14.4 million during fiscal 2012, compared to $16.8 million in 2011. The decrease reflects cost reduction initiatives that resulted in lower overhead costs and also reflects continued focus on initiatives that have near term product implementation potential and product cost reduction opportunities. Loss from operations
Loss from operations for the fiscal year ended October 31, 2012 was $32.1 million compared to a loss of $45.7 million in 2011. The decrease reflects lower product costs and decreased research and development expenses, partially offset by higher administrative and selling expenses. Interest expense
Interest expense, decreased to $2.3 million for the fiscal year ended October 31, 2012 compared to $2.6 million for the fiscal year ended October 31, 2011. Interest expense for both years includes interest for the amortization of the redeemable preferred stock of subsidiary of $2.0 million and $2.4 million, respectively.
Income/(loss) from equity investments
Equity loss of $0.6 million was recorded in fiscal year ended October 31, 2012 relating to our investment in Versa compared to income of $0.1 million for the fiscal year ended October 31, 2011.
Impairment of equity investment
An impairment charge was recorded in the fourth quarter of 2012 as an adjustment to the carrying value of the investment in Versa. Refer to Overview and Recent Developments for additional information. License fee and royalty income
License fee income for the fiscal year ended October 31, 2012 was $1.6 million compared to $1.7 million for the fiscal year ended October 31, 2011. The license fee income for both periods represents the license fee and royalty income earned from POSCO.
Other income (expense), net
Other income (expense), net, increased to $1.2 million for fiscal 2012 compared to $1.0 million for 2011. Other income (expense) for fiscal 2012 represents insurance proceeds received relating to an insurance recovery from a prior year claim and income received from scrap sales. Other income (expense), net for fiscal 2011 includes foreign currency translation gains on the Series 1 preferred stock obligation.
Accretion of Preferred Stock of Subsidiary The Series 1 Preferred Shares issued by our subsidiary, FCE Ltd., to Enbridge were originally recorded at a substantial discount to par value ("fair value discount"). On a quarterly basis, the carrying value of the Series 1 Preferred Shares was increased to reflect the passage of time with a corresponding non-cash charge (accretion). The accretion of the fair value discount was $0.5 million for the fiscal year ended October 31, 2011. The modification of the Series 1 preferred share agreement resulted in a reclassification of the instrument on the consolidated balance sheets in fiscal year 2011 from redeemable minority interest to a liability (preferred stock obligation of subsidiary). Refer to Recent Developments as well as the section on adjustment for modification of redeemable preferred stock of subsidiary below and Note 12 of Notes to Consolidated Financial Statements for more information. Provision for income taxes
We have not paid federal or state income taxes in several years due to our history of net operating losses, although we have paid foreign taxes in South Korea. For the fiscal year ended October 31, 2012 our provision for income taxes was $0.1 million, which related to South Korean tax obligations. Although we were gross margin profitable for fiscal year 2012, we cannot estimate when . . .