FuelCell Energy, Inc. is a developer of electrochemical technologies for electric power generation, and has developed a proprietary patented fuel cell known as the Direct FuelCell. A fuel cell is a device that electrochemically converts the chemical energy of a fossil fuel into electricity without the combustion of fuel. The fuel cell system feeds a fuel, such as natural gas, into the fuel cell where the fuel and air undergo an electrochemical reaction to produce electricity. The Company manufactures carbonate fuel cells, generally on a contract basis. Revenues for the fiscal year ended October 31, 1999 were $20 million, compared with $24.3 million the previous fiscal year.

The Company concentrates its efforts on the development, demonstration and commercialization of the Company's patented carbonate fuel cell for generating electricity. Different types of fuel cells are distinguished generally by the electrolyte medium they use. The Company's Direct FuelCell system employs metal carbonates as the electrolyte. The Company's fuel cell system feeds a fuel, such as natural gas, directly into the fuel cell where the fuel and air undergo an electrochemical reaction to produce electricity without the need for complex reforming equipment to create hydrogen gas from the fuel. A fuel cell power plant can be thought of as having two basic segments, the fuel cell stack module, which is the part that actually produces the electricity, and the balance of plant, which includes various fuel handling and processing equipment, including requisite pipes and blowers, computer controls, inverters to convert the DC output of the fuel cell to AC, and other related equipment.

The Company has been working on the development of its Direct FuelCell technology under contracts since 1977, with various government agencies in addition to the DOE, including the Department of Defense, the Defense Advanced Research Projects Agency, and the National Aeronautics and Space Administration. The Company currently receives its government funding primarily under a long-term Cooperative Agreement with the DOE. The Company's revenues have been principally derived from United States government and industry research and development contracts and license fee income. Government funding provided approximately 87%, 97%, and 92% of revenues in fiscal 1999, 1998, and 1997 respectively, principally by the DOE.

The Company has also been active in soliciting other business from industry and government organizations. The Company has been working on Direct FuelCell power plants for marine applications under contracts with the United States Navy and United States Coast Guard. In 1999, the Company received an award from the DOE to develop a high temperature membrane to overcome some of the shortcomings of present generation polymer electrolyte membrane fuel cells. The Company also has received several Small Business Innovation Research grants and research contracts from various organizations to explore advanced concepts or new applications of fuel cells. The Company has also licensed its fuel cell internationally to several major corporations, including MTU-Friedrichshafen GmbH, a subsidiary of DaimlerChrysler.

Because of the non-combustion, non-mechanical power generation process, the Company's fuel cell is much more efficient than the conventional power plants. Emissions of sulfur and nitrogen oxides are nearly zero, and other pollutants are minimal or non-existent. With the only moving parts being the air blower, in contrast to large rotating turbines, fuel cells are extremely quiet. In addition, fuel cells achieve high efficiency at extremely small sizes, allowing fuel cells to satisfy market needs for distributed generation, such as providing electrical power to a hospital or a retail store.

The Direct FuelCell uses hydrocarbon fuel without the intermediate step (reforming) of creating hydrogen fuel, which is more efficient, simpler and less costly, as compared with other external-reforming type fuel cells. The Direct FuelCell has been successfully demonstrated using a variety of hydrocarbon fuels including natural gas, methanol, ethanol, bio-gas, diesel and coal gas. The Direct FuelCell operates at higher temperatures than most other fuel cells. As a result, less expensive electrocatalysts can be used, and high quality heat energy is available for cogeneration. Even though fuel cells are believed to be superior to conventional generators in terms of efficiency, environmental characteristics, and flexibility of size, commercial sales of fuel cells have been minimal to date.

In further efforts to develop the Direct Fuel Cell for commercialization, the Company built an integrated power plant facility that can operate Direct Fuel Cell stacks up to 400 kW. A long-term endurance test on a 10-cell stack with the new cell hardware has completed over 13,000 hours of operational testing. The stack has met the performance stability goal for the Company's market entry product. In addition, an internally insulated stack enclosure has been designed and fabricated. The enclosure eliminates the need for inert stack environment gas, and provides for a much more compact arrangement of each stack within the multistack modules.

To date, the Company has operated two full height stack demonstrations. Power conversion efficiencies from pipeline natural gas to DC electricity of up to 47% has been achieved. Since the test facilities are optimized for flexibility instead of efficiency, this achieved efficiency level should translate to more than 50% electrical efficiency in commercial operation, and more than 75% employing cogeneration. Ruggedness of the product design was demonstrated in planned stress tests, such as rapid ramp-up and thermal cycle tests. Another test simulated emergency fuel loss, verifying that the Direct Fuel Cell stack can be maintained in the field cost-effectively despite fuel supply or power failures, without hampering performance. To date, a total of more than 1,250,000 kWh have been produced using a stack, which began operation in March of 1999. Total operation time has exceeded 7,500 hours, including four thermal cycles.

Recent market research has indicated that the demand for fuel cell power plants from early commercial adopters of the technology may be greater in the sub-MW size than the larger sizes. To meet that demand, the Company plans to take advantage of its license rights to the Hot Module fuel cell developed by MTU. This nominal 250kW design, which incorporates the Company's fuel cell stacks, uses an innovative integration of some of the elements of the balance-of-plant with the fuel cell stack module, with the expectation of reducing costs to the power plant as a whole. The design is very compact and specially suited for cogeneration applications.

During 1999, the Company delivered fuel cell assemblies to MTU for a field demonstration of the Hot Module design at Bielefeld, a municipal utility in Germany. The cogeneration plant was successfully commissioned in November 1999, providing up to 225 kW of electricity and the by-product of high quality heat, at an overall thermal efficiency exceeding 75% feeding 80,000 kWh to the grid, as of December 1999. An additional demonstration of a hot module cogeneration plant is planned in Germany during 2000. This plant, as before, will use Company supplied fuel cell assemblies. The Company also plans to conduct its own field trials of a 250 kW unit at a host site selected by Los Angeles Department of Water and Power. Additional United States field trials are planned for late 2000. The Company is currently revising MTU's design to comply with United States codes and standards.

The Company competes with other companies involved in fuel cell development. In the United States, M-C Power Corporation is engaged in the development of carbonate fuel cells. In Japan, at least six manufacturers have demonstrated interest in developing and marketing carbonate fuel cells, including Mitsubishi Electric Company. In addition to the carbonate fuel cell, other types of fuel cells are also being developed by such companies as ONSI Corporation and Ballard Power Systems.