燃料電池能源 (FCEL) 2003 Q1 法說會逐字稿

Good morning.

My name is Tiffany.

I will be your conference facilitator.

I would like to welcome everyone to the first quarter 2003 earnings results conference call.

All lines have been placed on mute to prevent any 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 "*1" on your telephone keypad.

If you would like to withdraw your question, press "*2" on your telephone keypad.

Thank you.

Mr. Eschbach (ph), you may begin your conference, sir.

Thank you.

Good morning, everyone.

This is Steve Eschbach, director of investor relations at FuelCell Energy.

On behalf of my stellar executive management team here at FuelCell Energy, I'm delighted to have you join us for our first quarter 2003 conference call.

Delivering formal remarks today are Jerry Leitman, chairman and CEO, and Joe Mahler, CFO.

Before proceeding, I will read the following Safe Harbor disclosure statement.

This presentation contains forward-looking statements including statements regarding the company's plans and expectations of the development and commercialization of its FuelCell technology.

Listeners are directed to read the company's cautionary statements on forward-looking statements and other risk factors in its filings with the Securities and Exchange Commission.

I would now like to turn the call over to Mr. Jerry Leitman.

Thanks, Steve.

Before I provide my formal remarks, I'd like to turn this call over to Joe Mahler, who will review the first quarter financial results - Joe?

Thanks, Jerry, and good morning, everyone.

FuelCell Energy reported an increase in revenues of 47% in the first quarter of 2003 to 10.3 million compared to 7 million in the same quarter of the previous year.

Net loss for the first quarter of 2003 was 16 million or 41 cents per basic and diluted share compared with a net loss of 6 million or 15 cents per basic and diluted share during the same quarter of the previous year.

Cash, cash equivalents and investments, all U.S. treasuries, on hand as of January 31, 2003 total 200 million.

Cash used was 20.1 million in the first quarter, including 2 million for capital expenditures and 3.5 million for working capital.

Depreciation expense for the three-month period ended January 31, 2003 and 2002 was 1.2 million and 615,000 respectively.

Revenues in the current quarter were attributable to the production of DFC (ph) power plant, shipment of FuelCell components, and progress on the company's research and development contracts.

Net loss for the current quarter reflects the company's investment in the standardization of DFC power plants, developments of its distribution network and increases in operating costs including employee expenses, depreciation related to plant expansion, information systems, and infrastructure.

We remain on course with our previously stated financial expectations.

Cash flow pattern of the last two quarters will continue through the second quarter into the third quarter '03.

We will continue to see the market with deliveries of sub-megawatt and megawatt power plants, finish our near term focus of standardizing DFC products and continue working with our distribution partners to generate orders.

Depending on how the market develops, we can respond to growth or we can adjust to a slower path.

If the market continues to be weak, we will implement a strategy to reduce our cash use to 7.5, 10 million per quarter or an annualized rate of 30 to 40 million.

With 200 million in cash, we remain well positioned.

I will now turn this call back to Jerry.

Thanks, Joe.

I intend to have some brief remarks on our deliveries on the field trial program update, some other developments we wanted to talk about, and then talk finally about our key focus areas for calendar and fiscal 2003.

First, we're seeing considerable progress in delivering and operating our enhanced DFC 300A power plants to our distribution partners for their customer sites.

We have generated over 7 million-kilowatt hours of electricity at customer sites in Japan, Europe and the U.S.

By the end of our fiscal year, end of October, that number will exceed 15 million-kilowatt hours, and we will be at a run rate of over 15 million-kilowatt hours per quarter just with our existing backlog of units, exponentially increasing our product performance database.

Our first DFC300A, a unit from Arabane (ph), was delivered to Kyren (ph) Brewery near Tokyo in Japan and installed in January.

This unit recently passed initial acceptance testing with co-generation.

What's interesting about this unit is that it operates on digester (ph) gas from the breweries wastewater treatment facility during the work week, and switches over to propane on the weekends, since the brewing process does not operate on weekends.

Consequently, this marks the first dual fuel unit for our DFC power plants, the first one on digester gas and the first one on propane at a customer site.

Additional deliveries from Arabane's customers will continue with a next unit delivery to Nippon Metals scheduled later this month and others in April and May.

We also shipped a DFC 300A to PP&L's customer, the U.S.

Coast Guard barracks in Bornmass (ph), our first DFC power plant at a military base.

PP&L and the customer are completing final site preparation before the unit commences its initial start-up, which is expected this month.

Additional units for PP&L customers are scheduled to begin next month.

We shipped one stacked MTU during the first fiscal quarter of 2003, and another one yesterday.

MTU has six combined heat and power sub-megawatt units operating in Europe in a variety of applications including energy Bottenburtenburg (ph) for a Michelin plant in Germany, a tire manufacturing plant, where the waste heat is used to vulcanize the tires in the process;

Deutsche Telekom also in Germany for DC power for a telecom center in Munich;

IPF Monderberg (ph) in Germany for a university medical clinic;

Ethar (ph) in Spain formed a ship-building facility;

Rhone (ph) Clinic in Germany, a hospital; and RWE, Germany's largest utility at an energy park.

The next unit to be commissioned by MTU is a sub-megawatt power plant for a British (inaudible) clinic in Germany through Falswork (ph) in May of 2003.

More information about these units can be found at the MTU website.

In January, the FuelCell activities of MTU were consolidated in a new subsidiary, MTU/CFC Solutions GMBH, focused on advancing FuelCell commercialization in Europe.

Caterpillar is near completion of its first order under our alliance agreement.

Late last month, we participated in Ohio Governor Taft's funding award to America Municipal Power Ohio from the Ohio FuelCell initiative.

As a result, a DFC 300A power plant will be located at a substation in Westerville (ph),Ohio to provide grid support for the municipality's local electric distribution system.

Volt Power Systems, Inc., a Caterpillar dealer, and the city of Westerville expect to finalize the negotiation and execute a contract for delivery, which is slated for the fourth calendar quarter of this year.

This will be our first DFC 300A in a grid support application.

We're also making excellent progress on our joint development of a Caterpillar-branded DFC 1500.

That is a one megawatt plant, scheduled for delivery next year.

As far as the field trial program, L.A.

Department of Water and Power is a great customer and an excellent market, and has ordered two more DFC 300A units which will be shipped later this year.

As an extension of their FuelCell program and as part of their multi-unit order, we also delivered a DFC 300A to operate at the LADWP headquarter site.

This DFC 300A power plant has passed initial acceptance testing and 100% of its nominal output, 250 kilowatts, with an electrical efficiency of 47%.

This unit will be identical to the other two that will soon be delivered and with three similar units operating at L.A., we will be able to optimize maintenance, operator training and spare part supply.

LADWP is planning a dedication ceremony for this new DFC 300A on Friday, and we will be participating in that event.

A media advisory is due to be released later today.

They are to ask questions before anybody else.

Pardon?

Let me continue.

We completed the DFC 300 field trial at this LADWP site.

Much of the success of this field trial has been incorporated into the DFC 300A units we're now shipping to customers.

While the unit operated at various levels throughout the field trial program, we were able to demonstrate electrical efficiency in excess of 45% with continuous operation at 80 to 90% of the nominal rating.

The DFC 300 unit from LADWP has been returned to Danbury for redeployment to another customer site for continued operation.

We are continuing operation of the DFC 300 at Mercedes in Tuscaloosa and are achieving good results.

Electrical efficiencies are exceeding 45% at 80 to 90% of the nominal rating.

Along with our partners in the project, Southern Company and Alabama Municipal Electric Authority, we will continue with the field trial for another six to 12 months, learning as much as we can during this test period.

Meanwhile, our megawatt class field trial program has begun.

The first one megawatt DFC 1500 power plant is undergoing testing and preparation for operation next month on natural gas, grid connected, in Torington (ph) prior to delivery to the customer site.

The unit will be delivered to the King County, Washington Municipal Wastewater Treatment Facility to operate on anaerobic digester gas after slight preparation is complete, which is expected in early summer.

Production continues on our first two-megawatt DFC 3000 power plant, which will be delivered to the Wabash, Indiana coal gasification site and operated on coal-derived synthetic gas later this summer.

To look at some other developments during the quarter, first and previous, first I'd like to focus on cost reduction.

We made some great strides reducing cost in the production and procurement of our FuelCell modules, as well as cost reduction in the DFC 300A balance of plants driven by execution of value engineering, procurement and packaging strategies.

Quality and process initiatives with our Torington manufacturing facilities have improved yields in some of our key production processes by 25 to 30% over the last year.

These improvements in production coupled with purchased material cost improvements and higher production volumes over fixed manufacturing costs have resulted in a reduction in the overall module cost for the DFC 300A of 30% in the last year.

Our megawatt class products will realize the benefit of these efforts immediately, because our manufactured repeating FuelCell components are interchangeable and available for use in all of our products.

As a result of the value engineering and our early commitment to investing in multiple vendors for most components, our second dozen DFC 300A balance of plants purchased will result in a 30 to 35% cost savings over the first 12.

And an additional multi-unit balance of plant is anticipated to yield similar or even greater incremental savings.

The lessons learned from executing on our DFC 300A balance of plant strategy are expected to yield significant benefits to our megawatt class BOP purchases faster and provide greater benefit because of known economies of scale.

The key point is that our costs are on track with respect to our expected cost curve and current volume levels.

We announced recently that the company has received Rule 21 certification in California, which is intended to streamline the permitting process for distributed generation equipment, while ensuring safe interconnection with electrical grid.

This certification will significantly reduce the time, cost and complexity for future interconnection, avoiding costly external equipment procurement requirements and extensive site by site as well as utility by utility analysis.

As regards to the direct FuelCell turbine, we've begun initial testing of the 250-kilowatt stack and the 60-kilowatt caps on micro-turbine (ph) to extend this proof of concept testing of this high efficiency hybrid power plant.

In the larger 10 to 50-megawatt combined cycle design, the DFC turbine is expected to approach the 75% electrical efficiency target as specified by DOE's Vision 21 program while retaining the ultra low emissions of the company's DFC power plants.

In our work for the Navy, we continue to make progress on Phase II of the Marine diesel program.

Work continues on the development of a land-based 500-kilowatt field trial that will operate here in Danbury and then later at the Navy yard in Philadelphia.

Looking forward to 2003, we've identified six key focus areas I'd like to comment on.

First is delivering and commissioning the DFC 300A power plants in the backlog.

We're very pleased with the initial performance of the units that have been delivered and been operating.

We expect to ship several additional DFC 300A power plants to customer sites each quarter.

Second, implementing field follow-up program, the good initial performance of the DFC 300A units at Kirin in Japan and LADWP in Los Angeles is validation that the field follow-up program is starting off with success.

The exponential growth of the data we will be collecting at subsequent power plants are delivered to and begin operating at customer sites this year will further validate the DFC 300A product.

In the megawatt field trial program, we see the megawatt DFC products as the quickest path to the most economic generation of power by fuel cells in our target markets, leveraging the economies of scale of this much larger fuel cell power plant.

In addition, grouping multiple megawatt units can achieve further cost reduction, thereby making the price on electricity generated even more attractive.

We're looking at -- a key focus is generating additional orders.

I will say that macroeconomic, geopolitical and industry-specific events have continued to impact our progress in generating orders.

The power industry is slow to recover, a sluggish economy has yet to rebound, and resulting business capital spending has been curtailed.

Demand for power remains down and planned power plants continue to be canceled as a result of the credit crunch in the industry that still remains.

Finally, government actions are becoming more tentative, as budget deficits command more attention and geopolitical uncertainty has garnered more national focus.

However, the interest in our direct fuel cell distributed generation technology remains high in the markets we're targeting.

The city of Westerville substation unit in Ohio demonstrates that in selected locations, we can secure new orders today.

In addition, a number of our projects were selected for second-round consideration by the Connecticut Clean Energy Fund for both grid support and commercial projects.

Activity on our proposal pipeline continues, and together with our distribution partners, we continue to work on a number of bids for new orders, some of them being multi-megawatt projects.

And finally, as Joe mentioned, we want to manage cash consistent with market demand.

Our near-term focus has been to standardize our products, increase our production volume, and develop our distribution network.

All these costs have been reflected in our financial results to date, which were consistent with what we said during our last conference call.

Our strategy is to manage our cash so we will have the financial flexibility to match our business with market demand.

With 200 million on hand, we have just that.

Let me make a final word about the hydrogen economy.

In recognition that a hydrogen infrastructure did not yet exist and was far into the future, this company, more than 10 years ago, selected the high temperature carbonate fuel cell technology as the best one for stationary power plants because it internally generates its own hydrogen from multiple fuels.

Current national discussions validate this decision as estimates for the development of a hydrogen infrastructure is 10 to 20 years away at best.

Our DFC power plants generate hydrogen from multiple fuels and we use the hydrogen to generate electricity and a heat byproduct that is either used for co-generation or for additional electricity generation in the case of the DFC turbine combined cycle.

However, should the hydrogen infrastructure develop as some predict, our DFC power plants can be a co-generator of electricity and hydrogen with the hydrogen used in the infrastructure, used to refuel automobiles, or used to power pen fuel cells.

The key take away is that we are a company with a fuel cell technology that can operate on readily available domestic fuel such as natural gas, which already has a fully developed delivery system.

We can operate on renewable fuels such as what we are doing in Japan on anaerobic digester gas from Kirin's wastewater treatment plant.

Later this year we'll be able to say we operate on coal mine methane gas and synthetic gas derived from coal.

The bottom line is that we are delivering and operating units today with greater efficiency, ultra low emissions and better reliability.

And with that, I'll close my remarks, operator, and open the call for any questions the participants may have.

At this time, I would like to remind everyone in order to ask a question, please press "*" then 1 on your telephone keypad.

We'll pause for a moment to compile the Q and A roster.

Our first question comes from Chris Kwan.

Hi, gentlemen.

Can you comment on your backlog position right now?

Hi, Chris.

The backlog right now, if you look at the product sales category, we have about 7.25 in backlog there, and we have on the government side about -- R&D side, about 4.25 megawatts.

That's on the government side.

Ok.

Secondly, on this Cat program, the 1500 - or 1.5-megawatt power plant that they're developing, can you give some more details on that, the timing and -- I'm assuming that's going to be all FuelCell product, or is there something that Cat is incorporating?

It will be a Cat-branded, Cat-developed FuelCell product in that size range.

We will provide the FuelCell module, the entire balance of plant will be designed, developed and provided by Cat.

We do anticipate Cat to marry that product in some kind of combination with gas engines, or gas turbines, or sell it as a standalone.

But which one that is depends on the particular need.

There is an attractive marriage of a one megawatt FuelCell product with a1.2-megawatt gas engine where the gas engine provides load following and so forth as necessary and peaking, and yet because you have the two products in combination, the overall emissions are much -- dramatically reduced from an engine-only.

So regardless, there will be a 1-megawatt freestanding Cat FuelCell power plant that is with the Cat brand on it that includes our module and everything else developed by Cat.

This will be about an 18-month engineering program, and they're spending several million dollars this year in engineering that product for delivery in 2004.

Where it will be delivered is still being developed jointly between the two companies.

Ok.

And then Joe, you mentioned the cash usage.

You're sticking with the guidance you talked about last quarter.

This quarter, you're up to around 20 million that you've used.

Do you expect that some of that will slow down obviously, and when do you expect -

I would expect the next quarter will be somewhere between 15 and 20 for this quarter, and that will continue into the third quarter.

That's pretty much the pattern at this point.

I'm just wondering if you expect another 15 to 20 next quarter then.

You're getting pretty close to your full-year guidance.

I think the pattern has been 20 million a quarter.

I think for the April quarter, we'll do approximately the same.

Then it should start to reduce in the July quarter.

So if you have 20 and 20 in the first two quarters, depending on what market conditions look like, so if it looks like orders are being generated and we can continue to expand, then we will probably maintain that pattern.

There's also a scenario where if the market seems to be a little bit slower, then I think we can get that cash flow down to the 7 to 10 per quarter that I discussed in the conference call remarks.

Ok.

Perfect.

Thanks.

Our next question comes from Jarett Carson.

Hi.

Good morning, gentlemen.

Good morning.

Joe, just a couple of the questions.

Gross margin looked like it improved certainly a little more than I was expecting, at least for the first quarter, I know the fourth quarter of last year, you were kind of at a 4-1 on the product gross margin.

This time about 2.7.

I guess two things.

Are you continuing to be on track to kind of get that down to a 2-1 by the fourth quarter, and maybe what was the issue that helped things out a little more this quarter?

I believe that we are on track to reduce cost.

Our ultimate objective is to get to the 1-1 relationship that we believe we have at about 50 megawatts of through put.

Our ability to get down this cost cover is volume-related.

In this quarter, I think what you're beginning to see is you're seeing a reduction of the first time cost of the product and a reduction of our efforts on the standardization process.

As the DFCs go into the field, we now move to the field follow-up program that's starting to mature.

In terms of the R&D contracts in the quarter, I think there was a little bit of a mix situation with the R&D contracts, so I think in the quarter, you had a little bit less of the large car share contracts.

If you were tracking the two previous quarters, you saw that we had higher costs and higher revenue in both those quarters, and that was really related to much of the material purchases for the megawatt class contracts for the King County.

As you know, the King County, we're now testing that unit so a lot of those costs are behind us and we're also pretty far down the path on the 2-megawatt plant.

That's actually where I was going next.

On the R&D contract revs, visibility for the next few quarters, are we in the 5ish range, maybe plus or minus a million, or should we expect something to pick up again as you deliver?

But I think you're using kind of project completion-type recognition on some of that stuff.

I think you're exactly right.

I think our guidance in the past is we're kind of ranging R&D contracts to between 20 and 30, and I think for the moment, I think we'll stay there.

I think you'll see a range of 20 on the low end and 30 on the high end.

Ok.

On SG&A, picked up quite a bit from Q4.

Is this a fair run rate or around 3 versus fourth quarter was 2.2, or do you consider -- is this going to pull back a little bit where there's some extraordinary issues perhaps in this quarter?

I think it's going to pull back a little bit, but let me -- as you know, Jarett, quarter to quarter, we move a little bit on SG&A.

The run rate, you know, 3 million on the run rate is probably a little bit high, but last year we ran for the total year about 10.5.

We have seen increases coming through, especially in some of the infrastructure support areas like information technology.

We've seen some increases in business insurance, which I suspect that everybody in the marketplace has seen, and I think the combination of that, you'll see some increase over last year's SG&A.

Ok.

And then I think finally, Jerry, what is maybe your view, maybe getting kind of market feedback from Japan on -- the Bukoka (ph) plant as well, isn't that very near term, and then kind of how are they positioning perhaps with Marabanie (ph)?

Yeah.

As I said, we'll be shipping every month to Japan.

They've announced the Nippon Metal, they've announced the Fuko-Oko (ph).

There are other units that we're shipping that they haven't announced the siting yet -- we're aware of them.

I think it's fair to say that virtually all eyes in Japan are on and have been on this Kirin brewery unit.

The initial acceptance testing by the government was very positive, and, you know, if you know the Japanese market, you know it's very, very difficult to penetrate as a foreign company, but once you do penetrate and prove yourself, you have the blessing.

And we're in that process right now, and as I said, it looks very positive.

There was kind of a lot of pent-up demand to see this first unit in Japan, and I'm going over, I think in April, for a big ribbon-cutting and dedication of it, so -- and that's kind of how we see the Japanese market developing.

I think you'll see the same thing on Japex (ph), which is - I mean, on Nippon Metal, which is a natural gas unit, and then Fuko-Oko, which is municipal based water.

So it's a pretty exciting time over there.

And just to finish up, you know, one of the --maybe a lower priority but certainly from an R&D perspective is to increase the power output on the modules, and I know that's perhaps a longer-range-type priority, but where are you positioning the next power level would be, I believe going to like 300, if that's about right?

Yeah, it's about 300.

It's 1.2 megawatts on the megawatt plant, so about 300 per stack.

It's not that critically important to us right now.

We have the development programs underway.

That looks pretty straightforward.

It's more important to us to see what is the right size megawatt plant that we need or sub-megawatt.

You know, is the sweet spot 250, 280, 300, is it one megawatt, 1.2, 1.5?

So that's kind of what we'll find out in the hotel segment, the industrial segment, the hospital segment, the critical reliability segment, grid station support, so it's more of a question of what do we need from a marketing standpoint because if we can continue to focus on cost reduction, that also includes getting additional kilowatts out, but if the market doesn't need that, if we're selling the unit oversized for the segment, then we don't gain anything.

So I think we're looking more at a learning curve, Jarett, then -- certainly going from 1-megawatt from 1.2 or 250 to 300, we know how to do that, ok.

It's just a question of what's the best market fit.

Ok.

Thanks.

Our next question comes from Mike Harris.

Good morning, gentlemen.

Good morning.

I wanted to review a couple of items here.

First off, I wanted to review that there were two unit shipments in the fiscal first quarter, one to Marabeni and one to MTU?

There was -- and to L.A.

Ok.

So the L.A. was shipped in Q1 as well.

Kirin Brewery and one stack to MTU, and right after the quarter, we shipped the unit to Coast Guard and another stacked MTU.

Ok.

Great.

And then Joe, that 11.5-megawatt backlog, is that as of today?

That would be -- does that include the last MTU?

That's as of today.

Ok.

Great.

And then the comment on that your DFC units have generated over 10 million-kilowatt hours of electricity, can you just give us a perspective of the actual operating hours accumulated over the various field trials?

I believe last quarter, you gave out a number of about 68,000 hours?

Yeah, I don't have that updated because we're more interested in megawatt hours or kilowatt hours of generation, and I could get that for you, Mike.

I just don't have that off the top of my head.

Ok.

You know, what we want is the units generating kilowatts, megawatts, you know, at or near their nominal ratings.

Running a part load is not really interesting.

I know some of our fuel cell competitors put how many hours of operation, but we're looking at more how many megawatt hours are you generating, what's the availability, what's the meantime between failures, et cetera.

That's the performance data that we're looking at that values the product.

So going forward, you're going to be disclosing your performance on a kilowatt hours basis?

Correct.

I mean, we can get the service hours too, but kilowatt hours is what we use as our main metric.

Ok.

Great.

And then just talking about the potential Cat order and the application in a substation, I was just curious, does that have the potential to be classified as a T and D application?

And I know that it's generating electricity, but because it's at the substation level, is there any chance that FERC may have the authority down the road to regulate cap-ex in this area?

I don't know whether FERC will.

I'll tell you why we're excited about it is we have other substation proposals that are much more significant than this one.

What happens is, and depending on which state, is that a deregulated utility that you're a wires company, you're not allowed to generate, and yet the wires companies need either to put in more wires or put in generation on site, and they're not allowed to.

That's happening right here in southwest Connecticut, where there's a huge grid congestion problem.

So to be able to in this case, municipality electric, but to be able to use a fuel cell distributed generation power plant to ease T and D problems, ease distribution problems, is a concept that we want to push through and in some cases, you know, regulatory authorities is what are standing in the way, not the demand, the need and so forth.

So from that standpoint, not from the 250-kilowatt, is why it's a pretty important project from our standpoint.

Ok.

Great.

That's all I have.

Thank you.

Our next question comes from John Adams (ph).

Good morning, Jerry and Joe.

Good morning, John.

A lot of news to report.

You mentioned - or you described the DFC 1500 as a field trial program.

If it's in the field trial stage, can you accept greater than 1-megawatt orders or do you have to wait for the DFC 1500 to shakedown in one or more applications before you can do that?

The first unit, John -- good question.

The first units, the first DFC 1500, the first DFC 3000 are like the first few DFC 300s.

They are field trial units.

What we are bidding commercially is what we call a field follow unit, which will be the next units built from that pattern.

The reason we can do that is that the 1500 and the 3000 are well up the learning curve within the stack, because there are four stacks in the 1500 module that are identical to the one stack in a DFC 300A, so we can go up that learning curve from the smaller units and apply that directly, whether it's repeating hardware, non-repeating hardware to the megawatt modules.

We also have been run-testing the balance of plant on those units in Torington, the one megawatt, for six months already prior to the fuel cell.

So we feel real confident in what we can quote future for commercial based on not only the 1500 and 3000 field trial units, those first units, but more importantly, the learning curve from the DFC 300 program.

But if I placed an order today for a 2-megawatt generator, when would you quote delivery?

Twelve months is what we're saying from after receipt of order.

For you, I could probably do that a little quicker, but 12 months is what we're saying, John.

Thank you very much, Jerry.

One final question.

What is your purchase order, John?

You want my credit card number?

You talk about several deliveries per quarter of DFC 300As.

And yet you are producing presumably somewhere between 25 and 50 megawatts.

There's a pretty big disparity there.

Let me tell you, we have 50 megawatts of machinery capacity.

Ok?

We have about 25 megawatts of people capacity to operate the machinery and do the assembly and so forth, so we're running probably in the 20 to 25 megawatt run rate, although we have a machinery and equipment capacity of 50.

But where -- several DFC 300As is, for the sake of argument, less than 1-megawatt.

And 25 megawatts on a quarterly basis would be 6-megawatts.

Where are the other 5 megawatts going?

Let me back it up just a minute -- 25 megawatts, ok, is two stacks a week.

Two 250-kilowatt stacks a week, ok?

Right.

And we're running between one and two stacks a week right now, about 1-3/4's, which says we will execute our backlog over the next several months.

Now, the shipment of those units depends on customer site being available and so forth, but we'll be shipping four to six units per month out of pier to customer sites, then we'll be shipping additional stacks to MTU for their use.

Did I answer your question, John?

Now I'm confused.

If you're going to be shipping four to six units per month to customer sites, you talked about several deliveries per quarter.

How do the four -- I mean, four to six per month is 12 to 18 per quarter, and you talked about several per quarter.

Well, it's more like 10 to 12 per quarter, John.

Ok.

So I just heard that wrong.

Ok.

Yeah, for a three-month period.

Keep in mind, our megawatt plants, you're talking about eight stacks, ok, for each module.

Yep.

I thought you were referring specifically to the DFC 300As, and you're not, and so -

I'm just looking at the ship list right now, and April, May and June looks like about four, eight, 12 units.

Hang up and go do it.

Ok, John.

Our next question comes from David Kurzman.

Good morning, folks.

You went quickly over the manufacturing efficiency numbers.

I was wondering if you could just do those one more time?

Ok.

It was part of the whole cost reduction scenario, and I think if you take -- what we've done is take the fact of the improvements in the yield and manufacturing processes.

If you take that as well as the factory materials purchase price enhancements, and because what we make, the fuel cells and the module that they fit into, the steel box that they fit into.

Those two combinations together are what yielded a 25 to 30% reduction in overall cost between units 9 to 12 months ago and units this quarter.

Ok.

And the Sheraton Hotel, is there any progress on those installs?

We're continuing to fight the battle with PP&L and Starwood versus - are you talking about Sheraton Hotels in New Jersey?

That's correct, the two units.

They're shipping this spring, David, both of them.

Ok.

What was the fight about?

I thought you were talking about the Sheraton Towers in Manhattan.

Oh, that.

Ok.

What's going on with the Sheraton Towers in Manhattan?

We, PP&L and Starwood are fighting exit fees and standby charges being reaped upon us by ConEd (ph), which even though NIPA (ph) is, or NICERTA (ph) is putting a million dollar grant against this project, the standby fees and so forth charged by the local utility are killing the project's economic viability.

That's because you're putting in capacity that's competitive to their own capacity.

Yeah.

It's called whose rice bowl are you --

All right.

Very good.

Thank you.

You're welcome.

Our next question comes from Kevin Casey (ph).

Hi, guys.

Hi.

Question.

As your products gain more traction and acceptability, are you able to raise your prices, are the contracts you're signing now for the same price and it's just more of a bring down the production cost?

I think I would say it a different way, that we're able to reduce our costs faster than we're reducing our prices.

What about raising the price as it gets more acceptance?

We don't see that.

We see driving our costs down, but reducing our sale price on a lesser basis so we improve our margin.

Ok.

Is there a certain like megawatt or number of units where it really starts kicking in?

It depends, obviously it's a volume issue.

But the other thing is that we know where the market clearing prices are in various states and even countries around the world, and our strategy is to penetrate these markets for each individual applications, and then expand that beachhead.

We've made a good start in hotels with Starwood, for example.

There are other hotel chains besides Starwood, and Starwood has another 700-plus properties, so you want to get started, do the demonstration, get their attention and then penetrate each of these market segments.

And that's the strategy that we're following.

We need to reduce our price further to get the market clearing prices, and where those market clearing prices are now, we're achieving that through various state and federal incentives that help to offset the lower volume, higher cost until we get to higher volume, lower cost.

Ok.

Thanks.

You're welcome.

Our last question comes from David Snow (ph).

Could you give us a little more description of how the Caterpillar product will work?

You indicated it will run on a combination of gas, I think you said gas engines?

Oh.

This is not a product, this is part of our periodic quarterly marketing and planning reviews with Caterpillar.

The question had asked is this a free-standing FuelCell product?

Yes, it is.

It's a 1-megawatt package power plant.

The difference is we provide the module and Caterpillar designs the balance of plant package, and, you know, paints it yellow and puts the Cat brand on it.

The second part of that is will it be used as stand alone?

Yes, but it will also be used to be packaged with other Cat generating equipment that makes a more attractive overall package, and the one I know they're talking about is combining it with a 1.2-megawatt gas engine so that the gas engine provides the low efficiency peaking and load following characteristics that our fuel cell doesn't, and the fuel cell provides the base load, and then the combination of the two makes a very attractive environmental or emissions package compared to an engine by itself.

So it's those kind of combinations that Cat is looking at, in their total marketing plans prior to their new product introduction, which will roll out in '04.

And you mean gasoline engine?

Natural gas engine.

Natural gas engine.

And this would be for a substation application?

It could be, and it could be for a large commercial industrial user.

Many industrial factories and large commercial operations have dozens of megawatts of load, so it could be for a large user or it could be for substation grid support.

Ok.

Very interesting.

Very good.

Thank you.

I want to thank everybody for the conference call.

I look forward to talking to you during the early summer.

Thank you.

Bye-bye.