燃料電池能源 (FCEL) 2002 Q2 法說會逐字稿

Welcome to the FuelCell second quarter

conference call. Jerry Leitman is your leader today, on

May 30, 2002 at 10:00 o'clock a.m. eastern time. This is

the on core replay for conference id. number 426-7497.

At this time I would like to welcome everyone to the

FuelCell second quarter conference call. All lines have

been placed on listen only mode to reduce background

noise. After the speakers' remarks there will be a

question and answer period.

If you would like to ask a question during this time

simply press star and the number one on your telephone

keyed pad. If you would like to withdraw your question,

press star then the number two on the telephone key pad.

Thank you. Mr. Leitman, you may begin your conference,

sir.

Actually this is Steve [Destar],

director of investor relations at FuelCell Energy. On

behalf of the executive management team at FuelCell Energy

we are happy to have you join us on our conference call.

Delivering formal remarks today are Jerry Leitman,

president and CEO, Chris Bentley, COO, and Joe Mahler,

CFO. Before proceeding I need to fulfill our legal

obligation to read the following safe harbor statement.

This presentations forward-looking statements including

the company's plans and expectations regarding development

and commercialization of the FuelCell technology.

Directed to read the caution area statements on

forward-looking statement in its filings with the SEC

commission. I would like to turn the call over to Jerry

Leitman.

Thanks, Steve. I would like Chris

Bentley to give you an update on the facility in

Torrington.

Thanks, Jerry, the stock assembly

area is rapidly building in process inventory of

submegawatt stack modules, assembling and increasing rate

of production of all components and subassemblies. We are

pleased at excellent progress has been made on production

recovery in the tape casting area. We are producing

electrodes and major [inaudible] on a single tape casting

machine with good quality. We have consistently met our

planned objectives for both of these components as we

continue to increase production rates to an expected

annualized level of 20 to 25 megawatts this summer.

The second tape caster has been ordered and it is

scheduled for start up in the fourth calendar quarter of

this year.

Our procurement team made progress working with

engineering for the balance of planned equipment. Either

in the first 16 to 20-megawatt plants are delivered we are

completing a comprehensive engineering program that we

expect to further reduce the cost of follow on product.

Initial deliveries of megawatt class D.O.P. will be

arriving in Torrington this summer, in preparation for

testing of the 1 megawatt power plant late this summer

that will be shipped to King County later this year.

Manufacturing continues to ramp up in all production

areas, we are preparing for the next level of production

capability. All major equipment required to produce

150 megawatts per year has been identified. For instance,

continuous cinerator furnace, well as well as, materials

handling equipment, et cetera. In order to achieve the

volume, additional testing facilities and module testing

facilities will be required. We continue to produce a

strategy that would place these facilities at regional

locations in order to enhance customer service and reduce

shipping costs.

I'll turn the call back to Jerry.

Thanks, Chris. I would like Joe

Mahler to review the recent financial results.

Good morning, everyone. FuelCell

Energy reported a revenue increase of 32 percent in the

second quarter of 2002, compared to 8.6 million. In the

second quarter of '02, to - I'm sorry.

8.6 million compared to 6.5 million in the same quarter of

the previous year. Net loss for the second quarter was

8.9 million or 23 cents per basic and diluted share,

compared with net loss of 5.1 million or 16 cents per

diluted share during the same quarter of the previous

year. Revenues increased 32 percent to 15.6 million for

the six month ended April 30, 2002 from 11.8 million for

the same period of 2001. Net loss for the six months

ended April 30, 2002 was 14.9 million or 38 cents for

basic and diluted share, compared with the net loss of

7.9 million or 25 cents for basic and diluted share, cash,

cash equivalent and the investments, being primarily U.S.

treasury, on hand as of April 30, 238 million.

Cash decreased by 15.5 million in the second quarter and

cash decreased 32.3 million in the six month period ended

April 30, 2002.

The loss were the primary items behind the cash use of the

three and six month period ended April 30, 2002. Revenue

increases in both the current quarter and the year to date

were due to contracts involving the King County waste

water, U.S. Navy marine diesel program and the DOE coal

mine methane project, as well as items shipped to MTU, our

European partner.

The net loss for both the quarter and year to date reflect

the increased head counsel, research and development

contract, continuing development of the field trial

program, design of the submegawatt and megawatt products

and increased selling and general administrative costs,

primarily sales and marketing and other sales related to

growth of our business. The result of the activity has

been to prepare for the commercial loss. We are incurring

losses now to position ourselves for the future. We have

added over 150 new employees during the past year

primarily in field services and manufacturing to bring the

total employee count to 320.

The strategy is to have the staff hired and trained to

follow the increase of the power plant units and work with

the distribution partners and customers as the units are

delivered to the field. Another initiative, develop our

balance to [balance of plan] and bonus suppliers. This

involves a number of first time costs as well as the

vendors and their suppliers for non-recurring engineering,

first article testing, vendor qualification, and

inspections and so forth. These first time costs are part

of the early commercial field trial units, leading to cost

effectiveness and reduction in the future. I will turn

the call back to Jerry.

Thanks, Joe. We are making

significant progress to prepare ourselves for the

commercial launch. The key near term objectives are

getting early units in the field at customer sites,

increasing production capacity, qualifying suppliers and

subsuppliers, and building the organization to support our

distribution partners and the market demand.

Our distribution partner network was enhanced by the

alliance agreement with Caterpillar we announced on

April 30. The strong commitment we reached with them

included incentives for order delivery, expansion of the

dealer network, selling the DSC power plants, and product

development is further validation of the FuelCell

Technology. Our market development agreement with MWH as

a partner with Anaerobic Digester Gas Processing expertise

for municipal and industrial waste water facilities,

enabled us to penetrate this renewable biogas market. The

global distribution partner base includes equipment

manufacturers as MTU in Europe, [Marabini] in Asia and

Caterpillar in North America, as well as energy solutions

companies here in the U.S. PP and L EnergyPlus, Chevron

Energy Solutions, [CMS By-Ron] Energy Services, and MWH

Energy Solutions.

We may choose to add partners in the foreseeable future

especially for market secretaries. We are confident we

have a comprehensive group of established energy solutions

and power generation product companies to compete

effectively in the global distributed generation

marketplace. Consistent with this we are focusing on

day-to-day inter action and training of sales and service

staff of all of our distribution partners. During the

summer, more than 75 representatives from our distribution

partner companies will be visiting us here in Danbury for

in depth sales and training on DFC power plants. The

partners with us for awhile are demonstrating success with

the power plants. PP and L announced the siting of two

sub-megawatt units for two different Starwood Hotels in

New Jersey, and was named finalist by the Connecticut

clean energy funds for two more sub-megawatt units for

Pepperidge Farms bakery here in Connecticut.

We continue to see progress by [Marabini] with the Kirin

Brewery announcement earlier this year and today with the

announcement of the 250 kilowatt unit for the city of

[Fukaroka], with one being a municipal wastewater unit and

the other being industrial waste water. We continue to

establish a strong global position in this important

market segment. I might add that King County waste water

plant where we are installing a one megawatt power plant

processing 115 million gallons a day, generating in total

8 megawatts of gas, while the waste water treatment plants

in [Fukaroka] process 119 million gallons a day. We see

potential at both sites.

FCE completed the commissioning process and are ramping up

a sub megawatt unit for combined heat and power plant at a

fuel cell energy park owned by RWE, Germany's largest

utility. Another heat and power plant unit is completing

testing and conditioning now and will be shipped in mid

June to Spain for Europe's largest ship building company.

The attractive operating characteristics of distributed

fuel cell power plant are gaining wider recognition

throughout the U.S. Three additional states, Michigan,

Ohio and Texas advanced initiatives to advance the

commercialization of fuel cell technology, adding to the

list that includes Connecticut, Massachusetts, New York,

New Jersey, and California. Partners are being considered

for incentives in many of these states already.

Incentive programs are gaining momentum overseas as well.

Germany's legislation for 5.11 cent per kilowatt hour

credit for grid connected heat and power celled power

plants up to 2 megawatts in size was approved and became

effective last month. In Japan there's continuing

government focus on subsidies, up to 50 percent for

projects involving municipal and industrial waste water

treatment facilities. As we mentioned before we need to

make the decision to Torrington plant by this summer if we

are to remain on track for 400-megawatt production goal in

2,004. Recent sitings and placements of the units in the

field and a broad as well as the positive developments

with global government initiatives are the drivers we are

looking at carefully as we assess the decision to expand.

We will continue to work with our partners to Market our

power plants before making this decision. Our focus is

the strategically position ourselves tore the leader in

our markets. We are making good progress towards

achieving that objective. We have a world class

distribution partners. Production capacity that is

established and expandable. We are learning from the

current field trial units and expect to accelerate

delivery during the next six months. Finally we are

building a strong organization and we have a solid

financial base.

With that I would like to open the call to any questions

you may have. Operator?

At this time I would like to remind

everyone if you would like to ask a question, press star.

Then the number one on your telephone key pad. We will

pause for just a moment to compile this Q and A roster.

Your first question comes from Christine Farkus of Merrill

Lynch.

Thank you very much. A question for Joe.

Is there a way to quantify the impact of the tape caster

accident in the second quarter on a cent per share basis?

Christine, I haven't really done that.

There's quite a few factors or several factors that play

into what we are working on right now. We are really

working to get the units, the new designed units to come

into the field. I think those, the combination of the

tape caster and the redesign have delayed it. But, you

know, those are multiple factors. We are at the

development stage company, moving forward. It's really

tough to try to pin it on the tape caster by itself.

Just as a follow-up then in terms of

inventory, a brief discussion at the beginning about how

this is, how you are building inventory, do you expect the

inventory to climb in Q3 and Q4 as you accelerate

delivery? Can you comment on the expected burn in the

first half versus the second half of the year?

In terms of the inventory level, we

clearly have built some stacks at this point in time. We

expected those stacks will move to product and will be

delivered.

At the same time, however, that we expected the business

to the company to continue to expand. We have a goal of

getting production rate up to 20, 25 megawatts in the

summertime. We are preparing for '03. I would not expect

to have inventory really decrease. The components of the

inventory I think would change perhaps, but we are looking

to build for the visibility we have in the marketplace, we

are looking to continue to build the business at this

point. What was the second question?

Do you have comments on your expected

burn in the second half of the year versus the first half

of the year?

There's a couple pieces to that

question. And the question is, we build inventory, the

biggest part, one of the big parts of the burn in of the

first half was working capital. We expect to continue to

build working capital in the second half. One of the key

decisions will be the decision to move to 150 megawatts.

And depending on the timing of that, it will have an

impact on how much we spend.

I think originally we were talking, I think in the last

conference call between ten and $25 million for that

expansion. Depending on when you start to do that, that

will will impact our cash flow. Assuming we move forward,

I expect the burn will be higher in the second half

Thanks a lot.

Your next question comes from Paul

Freemont of Jeffries and Company.

Thank you very much. Really a couple of

questions. One is can you give us any type of a sense at

this point as to what it costs per KW to manufacture a

single cycle unit? And to the extent that the subsidy

program is currently in place in Germany, why has that not

resulted in any material types of orders for your product

as part of your partnership with M T U?

Finally, can you give a percent of the track of

commercialization of the hybrid product? And how is that

unit performing and testing?

Paul, this is Jerry. As far as the

dollars per kilowatt, we said that with commercial launch

at 50 megawatts a year, the dollars per kilowatt is in the

2500 to $3,000 per KW range. That generates the cost of

electricity that we have shown before.

We still see that to be the case. And as Chris and Joe

both mentioned, we are doing a lot of one ups with

suppliers to to position ourselves to have the right group

of suppliers for volume commercial production

We are incurring a lot of those, first article testing and

the like today. You can't look at the field trials and

say these are the same cost level as commercial launch.

The second question on MTU, I am not sure that your

premise is right. MTU has not announced any newed orders.

In fact, I am going to see them in a few weeks, but we

know they are diligently pursuing. I think if you look at

the list of units they have in the backlog now, you've got

R W E, you have EI, Energy [Burtberg], the three largest

in Germany. There is a reason you have field trials.

Deutsch telecom is another one.

I think you'll see some traction from that German

legislation. But MTU tends to announce as they did last

time bunches of orders at one time rather than one to one.

As soon as they announce, we will announce likewise.

As far as the hybrid cycle, it is performing as well as

expected if not even better. What we need, and I think we

talked about this before, the 30 kilowatts Capstone unit

doesn't quite take the heat transfer we need. We still

have to bring in fresh air, which hurts the cycle.

Capstone is committed to send us a 60-kilowatt unit. We

are buying it. But they are having to specialty engineer

it. The delivery is sometime in August. As soon as they

do, we will install it on the machine and see even better

results.

We are very pleased with where we are to date on that

hybrid unit.

Does that answer your question, Paul?

I guess the only thing is, you're

currently in partnership with Caterpillar. You guys had

originally thought that the best application of a hybrid

might be somewhere in the 30-megawatt range. Wouldn't

testing with a solar turbine as opposed to a Capstone

turbine be required in order to see if that unit had a

market?

You are very astute. Solar

turbinees, we think is the right turbine partner for our

large cycle units. But you don't do pilot testing with

30-megawatt plants, Paul.

We can learn enough from the small scale 250-kilowatt with

a 60-kilowatt. With our D.O.E. contract - there's proof

of concept so we can approve - the solar turbinees

certainly work. The key issue is how do you get the heat

to run into the other and back? And so our plan is to

finish the proof of concept testing and then look at the

systems integration of a 40-megawatt plant. That's under

the figures 21 contract. Once we do that we will develop

a commercial strategy and launch it as a product line.

That's an '03 target as far as developing the strategy and

how we will launch.

Thank you.

Your next question comes from Jarrett

Carson of RBC Capital Markets.

Good morning, guys. Backlog for a

moment. The announcement, I believe, from [Maribani] this

morning, is that already kind of built into the previous

kind of purchase agreement? And then if you could comment

on kind of where backlog is at this moment?

Jarret, the [Maribani] bought nine

sub megawatt units. They announced the first, and then

this one today from [Fukaroka]. The backlog, Joe,

somewhere -

Just under twelve. That would be just

under twelve with - it's real in the same position. This

is deciding what is in the backlog. The backlog is about

twelve.

So delivery, we would still anticipate a

bit more of a healthy ramp on product delivery starting

this quarter, Q3?

Let me talk calendar quarters. Q3

calendar we'll see some deliveries starting and Q4

calendar we'll see quite a bit of deliveries.

We are, as you can anticipate with the delay we impacted

from the tape caster one to two quarters, that allowed us

to build up balance of plant inventory and the like.

As we start shipping, we will be shipping pretty often.

And then following that into '03 obviously

Back to the California CPA. I believe

there was a release that the CPA had chosen its agents for

the revenue bonding. What can you give is there in terms

of what you are seeing or hearing in terms of moving that

forward and getting some monies available, loosened up

there?

Cal power wants to do it. They

understand that both our technology and other new

technologies, their role as an aggregator is the way to

make this thing really move forward rapidly. New

technologies in the marketplace. From my viewpoint the

desire is very strong.

Whether or not they can get the financing, Jarret, there's

so many other influences there. It is a political year

also. So I just wouldn't be able to comment on whether or

not they will make the financing.

Another question here on product

commercialization. I know we discussed before and I think

your phrase is close to, we are selling commercial units,

but we just need to tack on commercial terms and

conditions.

What is, what are the steps, the two or three things that

we have to get over here to have commercial products with

commercial terms and conditions available and maybe some

type of time frame around that?

The time frame is, as we start

shipping these earlier units, Jarret, what we need to do

is get performance read outs in customer sites, as well as

testing here first and then customer sites, on the various

applications so we know how to put parameters around the

commercial terms and conditions.

Whether it's waste water plants or natural gas plants,

with co-gen, without co-gen and the like and build up the

experience base.

That doesn't stop us from taking commercial orders in '03.

We know enough about the products that we know what

commercial risks to take and what not to take. This is in

concert with our partners.

But as we get more experience with operating units around

the world, we can take, we can reduce our risk and take

stronger and stronger commercial terms

Thank you. I'll hop back in the queue.

Next question is Eric Prouty from Adams

and Harkness.

Thank you. With the additional states

joining on promoting FuelCell technology, can you give a

little indication of what you feel the aggregate dollar

amounts, this would be not including the large amount of

money available to the California power authority. Could

you give us an idea of how much money is available out

there? I guess more specifically, if you have a number of

the dollar value of the RFPs that are out there currently

for specific FuelCell power plants that your product could

address? Thank you.

RFPs we won't talk about. If they

are public, they are public. If they are not, we don't

talk about our proposal activity. We only talk about

awards.

It varies by state. Connecticut I think has about

$8 million in the state. They are trying to expand that

pot of money bigger. Massachusetts has, last I heard, 40

or 50 million. New Jersey, Joe, do you recall on New

Jersey what they had? About 20 million?

I think it was around 20.

New York has a lot of [CERTA] money

that they have. Michigan, Ohio and Texas are talking big

time. Texas is looking at a California type approach, but

for a thousand megawatts of FuelCell power plants. They

would pay for them via tax or rate increase on the dirty

power plants, quote. The dirty power plants would pay for

the FuelCells. That legislation will go also into early

next year.

So it is a varied map. And we track it pretty heavy. I

don't have the numbers at the tips of my fingers.

Keep in mind our partners, all of them in Europe and Asia

and here, they go for the funds, they or their customers.

We look at it more from a, we promote it at the state

level. It's the partners and the customers that do the

applications and go for the funds.

Thank you.

Your next question comes from Lisa

Callahan of ThinkEquity Partners.

Yes. Between now and until this summer,

what needs to be done to get the old tape caster to full

load? And will that be an announcement that will be made

in your next earnings call?

I don't know whether we will

announce or not, but we will be answer questions. Chris,

you wants to address what you are doing now?

Maybe you can go over the question

again for me, Lisa, I'm not quite sure I understood.

As I understand it right now, the older

tape caster is are you positiving at partial loads, two

loads a Kay day, two shifts a day. What needs to be done

to get it to full load between now and this summer when

you say it will run in the 20-megawatt capacity range?

I understand the question. We are

trying to be cautious with the way we ramp the equipment

up. We sort of planned and discussed in the last

conference call. And the progress we are making is really

very good.

It is simply a matter of extending the length of each of

the casts that we make on a daily basis. Currently we are

making two casts. Those two casts together cover roughly

eight or nine hours of the day. As we extend those casts

out we will be able to bring it up to 20 megawatts. We

don't have to change the processes or add any people. We

just need to keep doing what we are doing by adding a bit

of length to the cast each day

That takes how long? You said something

about hours?

We would expect -

If the question is how many hours

does it take to cast 20 megawatts? Is that the question?

Sure.

It is roughly twice what we are

doing now. It would be about 16 hours of casting on a

daily basis.

Okay. All right. Thanks. One last

question. Regards to the competitive environment, in

FuelCell how do you think is the most formidable

competitor and why, and can you comment on Mitsubishi

electric?

The biggest competitors are

traditional generation, the turbines. FuelCell

competition? The only company that is in our space is see

man's Westinghouse. We know them well. Used to be a

joint venture with them many years ago.

We think we have a lead of a year or two, based on what

they publish and present as far as when they are going to

have, what capacity when. So that's, you know, where we

see the competitive landscape.

Mitsubishi electric?

Electric. They are doing molten carbon,

right?

Mitsubishi electric some years ago

was a licensee of ours for motel en carbon and FuelCells.

They were what they call down selected from their R and D

funds from the government were cut way back and which

jumped on to [Maribani] as our partner in Japan as a

result of that.

IHI in Japan is the chief one now. We know them well and

[Maribani] knows them well. We are more years ahead of

them than even [Seamans] Westinghouse, both from cost and

performance and reliability standpoint.

Ingersoll Rand and [Stephens] announced

recently they are running a FuelCell gas micro turbine,

190 kilowatts. They announced that was the world's first

micro, you know, gas turbine FuelCell hybrid

Can you comment on that? And is it safe to say you have

done the same thing as a demonstration, if you will.

I am not going to comment on what

their claim are. We saw the same claims. Anybody can

claim anything.

As far as the difference there, it is a dramatic

difference. Our FuelCell and turbine are de coupled. We

take the heat energy from the FuelCell and put it into the

turbine. The net result of that is the turbine can run at

its pressure ratio, whatever it wants to do and the

FuelCell can run unpressurized which is what we want to

do.

The traditional approach that [Seamsns] Westinghouse has

taken is the turbine pressurizes the FuelCell. We believe

that approach is more complex and more costly. For the

same degree of performance than the approach we're taking.

And that's as much as I can really say about that. We

were - other than that, we mentioned in the press

release, we gotp got a patent on that. Any high

temperature FuelCell set were you present a heat

transmitting to a turbine like this. Any high temperature

FuelCell. We are quite pleased with that.

Thanks, Jerry.

Your next question comes from David

Smith of Salomon Smith Barney.

Good morning. I want to follow on to

Christine's question. She talked about the profit impact

of the tape caster. You didn't really have a, I guess a

definitive answer. Would sales be impacted by the tape

caster, impacted in this quarter?

I think absolutely. I did try to say

that. That the sales are clearly delayed. I mean the two

major things that we have been working on in the first and

second quarter are the redesign and getting those units

ready to go. And then the tape caster, you know, that

incident occurred in January. So it obviously pushed us

out, you know, one to two quarters.

So it's really - I guess I'm wondering

about your planned deliveries. What has been the impact

of the tape caster on this quarter?

I can't talk to the quarter, David,

but we said, what, Joe, five to 8 megawatts for the fiscal

year? We were talking 15 to 20 megawatts prior to the

tape caster incident, if not more. It has been that kind

of impact as far as shipments

Okay. So obviously a portion, which is

left to be determined, but of that 20 megawatts or

50 megawatts, it would have been in this quarter? And

ramping up during the year?

I think the impact was more like

two quarters and while we don't like that impact on the

financials and the like, the main impact from our

standpoint and our partners was getting product out in the

field. The more applications, the more diverse units we

have in the field, the more the it stimulates market

interest. That was more our regret than anything.

Okay. The second thing, can you comment

on the availability and reliability of the systems that

you put in the field? Leading up to the commercial

release of the next generation? Can you comment on what

kind of operating results you are getting out of the new

product?

We haven't reported on any of our

field trials and really don't intend to. The competitive

data and confidential data.

Number two, afield trial by its nature, you don't turn it

on and see how long it can run on a stable condition. You

take it through its trials. You do various testing, test

techniques at the customer site and with the customer's

blessing. That data, we retain that as internal

proprietary data.

From our viewpoint, we are quite pleased. We already

mentioned on previous calls, the information we gained

from the units in Germany and the units we ran here in the

U.S. have led to some significant changes both in

primarily in cost but also in opera built of the units.

We are pleased with where we are right now.

Is it system cost or reliability? What

are the main focuses?

The main focus is work ability

right now, and ease of work ability to operators. That is

the main focus. That is what the marketplace demands.

The secondary priority is cost. But, you know, that's

secondary right now. Pretty soon cost becomes the big

driver. Reliability, performance, work ability of the

product is the main thrust right now.

All right. Work ability, does that

encompass reliability and performance?

It is reliability. It is ease of

performance. It is ease of service engineers. When we do

have to perform service. It's understanding inter

connections to the grid. It is all of that together. It

is not just part of seeing how long it runs at a certain

point. What is the grid trip? What is the best way to

inter connect and change out filters for the water system?

What is the best temperature to keep the control cabinets?

What is the best control algorithms. All of those you

learn with each site and each application

That's what I'm looking for. One thing

on capacity. I might have heard it right, but you said

maybe in a different location. Did you say that?

Yeah owe mow

The capacity would be at a different

location?

Our strategy has been inconsistent

about that, David. We expect to continue to expand the

production of the basic FuelCell package in Torrington

through 400 megawatts. But as we expand our final

assembly testing, conditioning, module integration steps

and capacity, we would expect to do that at remote sites.

Satellite locations which ideally would be close to where

the customer's clusters are to improve service and reduce

transportation costs.

We don't see much volume leverage associated with the

final assembly and testing as we do, on the contrary, see

on the production of components. Basically that has been

our strategy for quite some time.

Is that with the U.S. you are focused on

that?

Right now we have two facilities.

One in Danbury for testing and conditioning and one in

Munich for final assembly and integration with the balance

of the plant. What Chris is saying is, Torrington as far

as automated cell production will be the site at least

through 400 megawatts.

But the assembly and test conditioning and testing should

be done remotely. We are doing in Germany now. Maybe in

California and Asia, et cetera. Rather than doing it all

here in Connecticut.

Got you.

I might also add it is attractive

for some of the state initiatives if you are willing to

put a FuelCell plant in their home state. We obviously

are using that.

The last thing, quickly. I am not

completely clear. I know you are talking about product

deliveries by year end. But the amount of inventory

that's building up, can you just comment on one last time

a little and just clarify for me? I think, we expect all

the inventory we see on the books now to be delivered by

calendar or fiscal year end? To me it seems like a pretty

large jump that we are seeing at this point.

The inventory is moved up to about

$18 million. In the inventory we have some cell stacks

that are completed. We are building our inventory of

cells and then we have also built up quite a bit of raw

material.

So about half the inventory, you know, could be considered

raw material, which is your basic material, your nick em,

stainless steel, those things.

What we are ramping for, we are going to get to

20.5-megawatt run rate. That's the kind of inventory we

have to build.

Then we will be adding D.O.P. to the inventory for a

shorter amount of time. The theory there is to try to

keep it on the balance sheet as short as possible.

Yes, we will be building inventory, but you will see some

movement in the inventory. You will see a bunch of units

starting to go out of here. You will see the

characteristic of the unit playing through. We will get

it finished and out the door and start the process all

over again.

A lot of this is a backlog thing?

You know, there's no activity in

the quarter. We see the business is there and we are

continuing to build the business.

You will see that inventory

currently on the books decreased, but I hope you see

inventory build. That means we are getting orders and

increasing the backlog. That's how we want to do it when

we launch into '03.

This is targeted at what is in the

backlog now. If, your net net would work itself down, but

this is for building towards the remainder of the year?

The next question comes from Neil

McAtee from Morgan Keegan.

Hello, Jerry. I just was, it looked like

you're now moving ahead. The question I had was, and Joe

may be the one to answer this. Costs of research and

development contracts was up a lot more than the revenue.

And also the R and D expenses were up. Is some of the

expenses of getting the tape caster back, is that where

they would show up, number one? Number two, is the

increase in employees from 165 to 320 mainly run through

R and D? And - or is there some other reason that maybe the

costs of the R and D contracts are up more than say year over

year? It looked like you had a positive gross margin last

year. Maybe there's something in the April 30, 2001

number. You need to refresh my memory why that was

actually positive and the flip flop this year.

Let me walk you through what happens

in our financial statements. In the quarter we had a nice

increase in the government contracting line item. Let me

back off of that for one second and the view of the

quarter as I have it, most of the impact is timing.

Product mix really drives our financial statements. So as

the product mix comes in, this leads to the question, why

do you have a positive product margin on government

contracting last year and why is the margin showing now a

loss?

The difference is we are getting from the government the

50 percent cost share contracts. In those contracts we

supply up to 50 percent of the contract. Those are good

contracts for us because we are getting terrific R and D.

These are, for example, King County, an EPA contract to

put the mega watt waste treatment unit in the field. It's

R and D, but it's putting a workable unit into the field.

We can get 50-cent dollars. If we go back to some prior

conference calls, we were estimates this year na part of

the government contract base would be the overall deal

D.O.E. contract, with clean coal, coal methane and Navy,

all have a cost sharing piece to that. The whole year, 20

to 25 of government contract revenue. We would incur a

loss of somewhere around, you know, somewhere between

three and eight, three to $10 million on contracting

because of the cost share contracts.

That's how our financial statements will work. In the

quarter it happens that a big part of the quarter was the

King County contract at a 50 percent cost share. That is

how the financial statements work.

On the R and D contract, the line down below, we are

spending R and D money and some value engineering with some

value engineering firms to help to engineer the packaging

of these units, which is one of our cost reduction goals

and the opportunity for us to do that was to do it now.

That's why you see that those costs are higher than last

year.

So just to summarize, really what you see in the quarter

is timing and you see product mix. And then your last

point is yes, we are, you know, we really are moving

forward. We are building this business. We are adding

people. We are over 300 people now. Yes, we need volume

out the door to absorb those costs. But you know, we see

that volume coming.

Great. This sounds like the third

quarter is where some excitement can begin.

We think every quarter is exciting.

Thanks, Joe and Jerry.

Next question comes from Bill Fogel of

Wachovia Securities.

Good morning, guys. Could you give us

the total kilowatt shipped for the quarter?

What was it, Joe?

I think in the quarter we actually

shipped sales to MTU, one plus - one plus.

One to two stacks. I don't know

exactly where the quarter went. We shipped to MTU. Those

are the units I mentioned. The unit for the RWE energy

park and for [EASER] in Spain. We didn't ship any out the

door, any units from here, from FuelCell energy.

Okay. Also in terms of potential

additional distribution partners, are you where you want

to be there? Should we expect some more distribution

partners announcements potentially over the next number of

quarters?

I wouldn't think so, Bill. We are

not aggressively seeking. There are some specialty niches

that we may do. When you look at, you know, we have three

strong OEMs, MTU in Europe, [Marabini] in Asia and

Caterpillar here. We have four good solutions companies.

I won't say no, never, but if people knock on the door, if

they make sense, if it's a good market segment - frankly,

as I mentioned, we will have over 75 people here in our

Danbury offices starting in a couple of weeks for sales

and service training.

By the wait, that only represents about a fourth of the

Caterpillar electric power dealers. Just primarily in the

northeast and west coast.

We are going to have plenty to say grace over as far as

getting these partners up and trained.

One of the interesting things we have seen, it takes about

a year for these guys to get traction in the marketplace.

And that's why we want to take our current crop of

partners and train them so they can start getting

traction. After that, you know, in there is a specific

partner that has a specific strong market position, we

certainly would look at it. But we are not aggressively

seeking anything like that.

Great. One last question. In terms of

the power electronics that you are looking to use for the

units, have you decided who the vendor is going to be for

those? If so, who that is or what stage of the process

are you in currently?

No, bill, we haven't. That is

where a lot of the first time calls come through. We have

operated G.E., we have A.B.Bs coming in, [Sef-con] coming

in. These are sub megawatt, 1 megawatt, and 2-megawatt.

We have mag na tech we are going one with, going through a

test period with them on our unit here in Connecticut. We

talked to emmer son.

In the three to five, four to five is where we want to do

it. We want to test them and put them in the commercial

field trial units and put them out at customer sites to

get a handle on who is the one, two, or three best

suppliers of that.

All of this takes time and all of which means you incur a

lot of first time costs. We would have been better to

stay with G.E. But in order to have the best suppliers

and the best costs going forward, we have to sort through

and see who really the best guys are.

Thanks, Jerry.

Your next question comes from Cyrus

Lowe of J.P. Morgan.

Good morning. Most of my questions have

already been answered. Can you talk about your

intellectual property and what the average remaining life

is on the patents?

We said in the press release, it's

39, Cyrus, in the U.S. and 90-something overseas. We have

somewhere between eight and nine years left. Some of the

much older ones have dropped off in the last year or so.

But we've got 39, of which 25 to 30 are really core, no

how ones. Then we have some others, as we are learning

new things and going forward, we are continuing to add

these. I won't say every quarter, but it's a major thrust

of us.

As you get operational, you start finding all kinds of

creative ideas that may not be core technology, but they

are pretty neat. It is a key thrust for us.

We don't believe, we looked at the portfolio in the last

three months. We don't believe that we have any real

exposure. We think we have the belt and suspenders pretty

well around our I P.

Can you tell us about the relationship

with MWH and quantify the opportunities you see for this

relationship? When do you expect as to see new orders

coming through?

They have to get trained. This

just happened. We are talking to them. We initially

talked to them on the west coast, that's where the

relationship started. They have multiple offices.

They are also big in power generation. But the key thrust

we are looking at is waste water treatment. I think you

will see that starting on the west coast. That's our

thrust. I don't want to say concretely.

They are one of the ones we need to get in and trained on

sales and service and from them to learn on their

knowledge on an aerobic digester gas. They are not

directly involved in King County, but when we crank that

unit up in late summer that is part of the training

process we want to go through with them.

Okay. Great. Thank you.

Your next question comes from Kelly

Nash of McDonald Investments.

Hi, guys. Can you go through, other than

the King County, which other units are scheduled to be

delivered this calendar year?

, I can give you off the top of

my head we are looking at the coast guard and one, at

least one of the hotel properties for P P and L.

We are looking at Kirin Brewery for [Marabini]. We are

looking at three or four more stacks for MTU. - Chris,

three to four? Three or four more. One or two more units

for L.A.. Help me guys if I'm missing anything.

Probably the University of Connecticut unit will go in,

the one that the governor announced.

It is - we are doing some juggling because we have two

things. One, we want to satisfy all of the partners'

commitments to their customers. Two, we want to get the

most interesting, the broadest geographical spread. The

ones that give us the best market impact going forward to

generate interest are the main thrust.

Can you talk about some of the problems

that you are running - can you give us the length of the

negotiation process that takes place as you are looking to

install or add new units to the backlog?

Part of it is getting these guys

trained because they tend to end up. We have a better

feel for where some of the market opportunities are than

they. So it is getting them trained to where they are.

Obstacles, inter connect standards are always an obstacle.

The local power gap doesn't want us around. That's true

around the world. Getting the gas company involved, that

has been successful in New Jersey, for example. Because

the gas company wants to be our partner, wants to sell gas

during the summertime.

Getting the multiplicity of co-gen operation options. The

FuelCell, particularly on natural gas or waste water gas

is standard to us now. But each cogeneration is different

whether you are generating esteem or direct firing to an

absorption chiller. Each of the co-gens is a different

scenario

Besides the inter connects, the local codes and standards.

The other issue is that, it's not surprising, I think to

anybody who looked at distributed generation. Many of the

customers don't want products. They want the energy. The

electricity and the heat from the co-gen. Therefore, it

is in effect a power sale agreement. Those are more

complex to develop than just selling a product across the

transom. Those are some of the issues, Kelly. I think

they are certainly not impossible. They have been proven

so far. From our standpoint we will have an order of

magnitude more salesmen, ten times the number of sales

membership on the street by the end of this summer than

the end of last summer. That will make a big difference

as far as impact in the marketplace.

Finally, can you give us an idea of how

many employees you are likely to add over the next six

months, year or so?

I think the paste,, going towards

'03, it will slow down. There are key areas that we are

hiring that we will continue to hire. It won't be bulk

process operators or a lot of field service or engineers.

A month ago we hired a very key guy for our spare parts

after market business. Now, you don't need a spare

markets spare markets guy until you go into a commercial

business. It will be that type of organizational add of

key people we need.

We looked at where the organization needs to be 30 years

from now as we get to 4 megawatts of capacity. We are

looking at the core spots within that and looking at how

do we add those. We have the people before we need them

instead of after we need them.

So the ramp up of employees -

Will slow down.

Okay, thank you.

Next question comes from Chris Kwan of

TD Securities.

Hi, guys. A couple of accounting

questions first. You went into a little bit on inventory.

Do you have a breakdown of that 1829 between within and

finish goods?

I haven't broken that down. In

effect, Chris, the - we've gotten stacks that are

completed in one context that would be finished goods.

It's just work in process to the completion of the total

unit.

We don't break it down into that type of detail. I say

half the inventory is raw material and half is either

finished stacks or finished or cell components or in

process cell components. That is where the majority of

the inventory would lie.

And you have other current assets that

has been rising the last couple of quarters. What is in

there?

Let me take a look. Bear with me

for a moment.

It's that 5.4 million.

In effect what it is, it's cash that

we are controlled substancing to vendors, primarily for

balance of plant type items.

Testing?

No, it's Dow payments.

The investments, what is in there?

That's U.S. treasury with alonger term

than 90 days. There is really no marketable securities or

anything like that. It is longer term U.S. treasuries.

Pretty much we probably average less than a year of

maturity on that.

Those investments could be considered

cash?

Absolutely. That's how we view it.

In the press release we tried to outline that these are

treasury. We view them as cash.

A bigger picture. Between the three

primary distributors, MTU and Caterpillar, how would you

rank those guys, one, two, and three in terms of the near

term and longer term prospects for more significant

orders?

I don't want to get in trouble with

the partners, but let me differentiate it this way. We

call these guys OEMs. We will eventually ship them

FuelCell or FuelCell modules. They will incorporate it

into a [Marabini] or MTU today or Caterpillar power plant,

as they develop the product.

So that is why we call them like an OEM. It will be their

power plant but with our FuelCell module as a prime mover.

The others, Chevron, MWH, P P and L don't make products.

They offer total solutions to customers.

We don't know in the de regulated distributed generation

world who will win out. Maybe both will. That's why we

want a mix of product type companies and energy solutions

type companies. I'm just not willing to bet. Obviously

Caterpillar is the largest in the world in distributed

generation. MTU is one of their competitors. [Marabini]

has a lot of partnership relationships in Japan and has

put in 20,000 megawatts of power plants. The energy

solutions companies in the U.S. have been all very

successful.

That's why I said consistently, we want six, eight, ten of

these guys. And then I know we will have some that exceed

expectations, some that don't immediate expectations but

in the mix we should come out okay.

What I'm trying to get at is, especially

between the three of those, you have U.S., Japan and

germany. Which market do you see opening up?

Germany, incentive is big. They had

good subsidies - you'll see some real traction. It just

became law. And there's a big green influence and a big

carbon tax issue in Europe.

Japan, big green influence, big carbon tax, Japan is

slower to adapt new technologies than North America and

Europe. When they adapt, they adapt very strongly.

U.S., much more free market, much more de regulation, less

environmental influence. So you know, I don't know which

one is going to win. Each has pros and cons. I wouldn't

be surprised to see all three major regions track about

the same way, but for different reasons.

Okay, great. Thanks a lot.

Your next question comes from Ali Agha

of CS.O.

Hi, from Banc of America Securities.

Couple of questions. Could you remind us of your larger

sized units that are being produced right now, looking at

what is the percentage completion so far?

The perjt exrietion completion

is - I don't have that in front of me right now, Ali.

It's - we had a big boost this quarter. We should have

impact next quarter on that. And then a little bit more

in the following quarter. I would say it's under 50 at

this point.

Is that average for all of them or one

particular project?

That's really King County?

What about the Navy and the coal mine

methane?

They are in various states of

completion at this point.

Okay.

We talked Ali for this year, year

to date we have 13, 14 million in - 13.1 in R and D

contracts. We are expecting to hit between 15 and 25 for

the rest of the year. You'll see activity on King County,

coal mine methane, Navy, DOE contract, vision 21 to a

smaller degree and perhaps some build up in clean coal for

the rest of the year.

Remind me, the total value of those

government contracts is what?

Another good question that I don't

have. I would say that the total backlog, I would say

it's probably in excess of 50 million.

But does that also include the sub

kilowatts in there? Is that just for the megawatts and

higher?

That includes everybody.

Also for the sub megawatts, are those

also right now accounted for on a percentage completion?

Yes, they are.

And with regard to the units that were,

that you planned to ship out, in Q3 and Q4, especially the

sub megawatt units, are some of those revenues already

showing up in the percentage of completion accounting?

Small amount is showing up. There is

some that is showing up in inventory, Ali. That inventory

will be transferred over to those units over the next

several quarters.

Okay. Jerry, as you look at the market

environment right now and you talked a fair amount on the

three different continents, generally speaking is it fair

to say that the near term opportunities are primarily

coming from some kind of government supported or sponsor

or subsidized programs? Are you seeing any pure private

companies without any subsidies right now stepping up to

the plate?

In general, no. If the money is

there, anybody is going to go for it. If the money wasn't

there, with the early adopters still buy? I think they

would. You are never going to find anybody not turning

down that money and it takes them some time to go through

the application process and the like.

The money is where we would focus

anyway, northeast, west coast, Germany, Japan. It is

there. Therefore, people are going after it.

Okay. Is it fair to say, then, that the

conversation that you are having particularly in the U.S.

for potential customers, your distributors are having, you

find a change in mind set today from twelve months ago

when everyone was focused on California and blackouts, et

cetera?

You seeing a change in people's thinking as you talk to

them today?

The ones that we are focusing on, the

ones we are getting proposals to - not talking about an

industrial plant or anything, these guys are as a have I.

The four star hotel chains, these guys are savvy.

Kilowatts are going to be free. There won't be another

blackout. The whole power industry was manipulated in

Californi. Electricity is cheap. That is kind of a front

page of the newspaper assessment. But commercial and

industrial customers our partners are talking to don't

believe that.

Okay. Final question. Jerry, as you

look at the decision to ramp up production and the

parameters that are out there, are you expecting or would

you look at the orders coming through the door that would,

you know, take you over the hump? Would it be more

comfort level in activity that is going on? What exactly

would be the key criteria for you to decide on capacity

expansion?

Comfort level in the commitment and

capability of our distribution partners. Comfortable with

that right now. I will be more comfortable after we train

75 or 80 of them.

That's more than anything, Ali - we will probably then

make that decision to CapEx, to spend the CapEx to go to

150 megawatts. It's 20 to $25 million, of which that also

includes some potential regional testing on the assembly

facilities which we can keep here in Connecticut. Don't

have to make them regional.

I don't want to be behind the production machinery curve.

I want the CapEx in there so I have a plant with machinery

to do 150 megawatts because I believe it can happen. Then

we'll control the cash burn by raw material inventory, how

many people we hire, how many workers, and the like. It

would be a darn shame to have a huge market demand and be

sitting here without the machinery capacity to do it. It

takes a year. I mean, the replacement tape caster Chris

mentioned earlier, we are getting it in six months. That

is where we were saying hey, if you get it to us faster,

we'll pay more. Six months is what it takes.

We don't want to be behind the eight ball when it comes to

machinery. We would rather control our cash burn to

volume based on what we see the market doing.

That would not necessarily mean orders

being signed?

Comfortable, as I am now, we have

the right distribution partners and coming up on the

learning curve and getting feet to the street, we will

spend the money. I won't make the decision right now, but

during the summer we will make that decision.

Thank you.

Your next question comes from Marco

Pencak of Credi Suisse First Boston.

Good morning. You have been talking

about inventory an the evaluation. Would you tell us how

many megawatts of stacks are actually in inventory today?

No, I don't think I'm going to, I

think it's related to the bag log. About half of the

inventories is related to cell manufacturing and to stacks

and it is being built up. You know, when we start

delivering these units, they will come out actually and

should be starting to come out one after the other that.'s

what we are preparing for.

We won't break out the pricing

publicly between cell stacks and balance of the plant,

marco.

I'm not trying to do that. Here is the

fundamental question. Your backlog has been potentially

flat for three or four quarters in a row now. You are

talking about expanding your near term, you know,

production run rate to 20, 25 megawatts. Looking to make

a decision on the 150-megawatt expansion.

Basically your backlog hasn't gone anywhere. You are

looking at the market. I know there's a lot of

encouraging signs. I'm just trying to get a sense of when

that all starts to come to, you know, a decision point.

I guess my question really to you, Jerry, is, you know,

the fact that you have not had the order intake to support

the kind of growth plan that you are talking about and

looking to, I mean, is it really that, you know, number

one you haven't yet had, you know, the sales force in the

field to be able to support that? And now that you made

those distribution agreements you are getting to that

stage? Is it that your field trials have not yet

proceeded sufficiently far that the end customer, the

ultimate customers are not yet prepared to place that?

In fact, are you sharing any of that data with them? I'm

trying to put myself into the shoes of a prospective

purchaser and saying what is it I need to see to make that

commitment to one of your distribution partners and give

you the order?

Can you help me put that together?

What you don't see, marko is the

proposal activity. That is what drives me. But go back

to your basic premise. One is, the more field trials, the

more units you put out in the field, the different

application and the more you stimulate interest. I can't

tell you how many Kirin Brewery plants in the world and

San Miguel and what the feeling is towards what they want

to could once we show them the unit in Japan. That gives

me some comfort level.

The second point is of not having the actual feet on the

street, if you will a year ago compared to what we will

have this year. I have probably more than 50 just

Caterpillar people coming in. Ten, twelve, 14 dealers.

When you start doing that and you look at - these guys

will want to quote a certain price, which is okay. But

they want to quote a certain delivery. If you say no,

delivery is two years, the order is over. Okay?

Sure.

You say I can deliver a sub

megawatt plant in six months, you've got them. In nine or

twelve months, you've got them. That's a chicken and the

egg thing. Once the distribution organization thing gets

traction, once we get more units out in the field for show

and tell, then I think you will see this thing take off.

I don't want to be behind the manufacturing and production

line. What I would rather not spend any capital until we

get the order backlog? Of course I would. On the other

side of the coin, that says to expand from a machinery

standpoint it will take twelve months. That will kill me

in the marketplace.

Let me ask you, because I can appreciate

it was a bigger sales force you are going to, you know,

hopefully generate more proposals but you said, you know,

what is giving the confidence today, which I obviously

don't see. The market doesn't see specifically is what

happens from the proposal standpoint. A lot of that

proposal activity would have been generated from the, you

know, sales force that was in place before you sort of

ramped it up or partially from them.

Let me ask you, of the proposals that are out there, you

know, what is it that you need to happen for those to get

closed? Or what needs to happen for that proposal that is

being discussed? What needs to happen for the actual

sales cycle to, you know, to shorten on those ones? I'm

talking about what additional ones might come. I'm

getting a sense, you've seen something, it's given you

confidence. What is it you need to see that converts you

from the possibility to it's in my hands?

One of two things. One would be

and easy one. A big aggregate tore like California power

an other states that we are talking about where they are

talking about a lot of megawatts at one time. A big

aggregate tore would be the easy way.

The other way is an aggregation of multiple orders from

our distribution partners. Let me correct you and maybe

the audience.

We signed the market development agreement with Chevron,

C.M.S. [By-Ron] and right before the power bids. We had

to do that. We since signed an alliance agreement with

Caterpillar. These guys have been in the marketplace

since January. They are not trained well. It's hit and

miss. But they haven't not been doing activity. Part of

what you do with a new technology like this, there's a lot

of qualification process. You have a customer, potential

customer, very interested. You have to go through what is

he paying for power now? What you can do to lay it out,

price it out and price it through them. If you want to do

it with a big chain like star wood, you have to negotiate

master agreements and the like. All of that takes a

certain amount of selling cycle far beyond the traditional

cycle. That is what we see behind us. And you know, we

could get order tomorrow or they could take 90 days or 120

days. What we are doing is positioning that. And as we

see that internally, that is what triggers us to do the

expansion.

Okay. A final point is, I appreciate you

can't and certainly shouldn't give specifics given the

uncertainty, but is there any metric that you can share

with us to help frame what you've just described?

I can't, marko. I don't know what

metric there is. Just watch for the orders. We'll

announce them as they come in. Watch for progress and

shipping units. Watch for the decision to expand or not.

The manufacturing facility.

Those are the key metrics that we go by externally.

Great. Thanks.

We have been more than appear hour.

I will take one more call, operator, please

Final question comes from Gary

Holdsworth of Wedbush Morgan.

First for Joe, the second tape caster,

how much incremental CapEx would na require? Is that

still in your budget or thinking that you shared with us

for like calendar 2002?

Yes. I think that the majority of the

tape caster will be covered by insurance minus a small

deductible. I believe that we have added some additional

capital to that, to enhance that operation with some new

things that we learned in the review of the tape casting

operations. That is probably in the rake of half a

million to $750,000 additional. That we think we will not

only improve the process but could add yield, et cetera.

Are you comfortable with around

20 million for calendar 2003?

More of a function, Gary, of when we

give the facility the go ahead on the 150-megawatt

expansion. Most of the capital dollars in the budget are

directed to that effort.

A clarification. So we know, on the

Pepperidge Farms, two sub megawatt unit. You are, it's

not in your backlog yet, right?

PP and L has seven units, sub megawatt

units in backlog. They announced coast guard and two

units at the Sheraton hotels in New Jersey. So this would

be part of the remaining four units that we have in

backlog that are orders with them, payments and the like.

Great. Thanks.

Very good. I want to thank

everyone. Sorry we ran a little long. Look forward to

talking to you again next quarter. Thanks a lot. By by.

Thank you for participating in today's

conference call. You may now disconnect.