燃料電池能源 (FCEL) 2003 Q2 法說會逐字稿

Good morning, my name is Sylvia and I will be your conference facilitator.

At this time, I would like to welcome everyone to the FuelCell Energy second quarter earnings 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 star then the number one on your telephone keypad.

If you would like to withdraw your question, press star then the number 2 on your telephone keypad.

Thank you.

I would now like to turn the call over to Mr. Steve Eschbach, Director of Investor Relations at FuelCell Energy.

Sir, please go ahead.

Thank you very much.

Good morning.

This is Steven Eschbach, Director of Investor Relations at FuelCell Energy.

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

Delivering formal remarks today are Jerry Leitman, CEO, and Joe Mahler, Chief Financial Officer.

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 fuel cell technology.

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

I would like to now turn this call over to Chief Executive Officer, Mr. Jerry Leitman.

Thanks, Steve.

Before I provide my formal remarks, I would like to turn this call over to Joe Mahler who will review our second quarter and year-to-date financials.

Joe?

Thanks, Jerry and good morning, everyone.

We reported an increase in revenue of 4% in the second quarter of 2003 to 8.9 million compared to 8.6 million in the same quarter of the previous year.

Net loss for the second quarter 2003 was 21 million or 53 cents per basic and diluted share compared with the net loss of 8.9 million or 23 cents per basic and diluted share during the same quarter of the previous year.

Revenues increased 23% to 19.2 million for the six months ended April 30, 2003, from 15.6 million for the same period 2002.

Net loss for the six months ended April 30, 2003, was $37 million or 94 cents per basic and diluted share compared with a net loss of 14.9 million or 38 cents per basic and diluted share in the previous year.

Cash, cash equivalents and investments, U.S.

Treasuries on hand as of April 30, totaled $180 million.

Cash used during the quarter was 20 million, including 1.2 million for capital expenditures.

Depreciation expense for the three month period ended April 30, 2003, was 1.3 million.

Revenues in both the current quarter and the year-to-date period were attributable to the production of DFC power plants and the shipment of FuelCell components.

Partially offsetting these increases was reduced revenue on government contracts.

Included in other income for the quarter was 1.4 million in state research and development.

The net loss for the current quarter and the year-to-date period reflects our investment in the standardization of DFC power plants, manufacturing and delivery of products, reduced funding on certain government contracts and increases in operating costs including employee expenses, severance costs, depreciation related to plant expansion, information systems and infrastructure.

Certain government contracts will provide less revenue this year than originally expected.

Congressional appropriations for our cooperative agreement with the DOE was reduced by approximately $5 million versus historical levels than what we originally expected.

The U.S.

Navy/Marine diesel program funding of $2.5 million has also been delayed.

We anticipate that this government funding will be restored to the requested levels next fiscal year.

In our previous calls, we have estimated research and development revenues to be 20 to 30 million for fiscal year 2003.

I will revise that estimate for 2003 to be between 17 and 22 million.

With the exception of the congressional appropriation process that delays expected government R&D funding, we remain on course.

The near-term focus has been on standardizing our sub megawatt power plants, increasing our manufacturing capacity to 50 megawatts, developing our distribution network, developing service capabilities and manufacturing and delivering units.

This has included completion of vendor qualification and first article testing on a number of balance of plant and FuelCell components.

We established the service department with the 24/7 call center and a spare parts inventory for our DFC products now operating at customer locations.

We integrated our second tape casting line with the existing manufacturing processes to ensure maximum output and yield from our [Currington] facility.

Finally, we completed sales and service training for our distribution partners to market our DFC products to commercial industrial customers.

With these near-term efforts behind us, we expect to see a reduction in our quarterly cash burn rate going forward.

We're targeting a quarterly cash consumption of between 7 to 10 million on an order flow of 5 to 6 megawatts produced and delivered annually.

We are looking to achieve this in first quarter '04.

We believe, at this level, we can manage our cash consistent with market developments, retaining the core organizational strength that allows us to ramp up our production levels should order flow increase.

With 180 million in cash, we had the financial strength to adapt to market conditions.

I will now turn this call back to Jerry.

Thanks, Joe.

As Joe mentioned, our product standardization is essentially complete for the sub megawatt units and well on the way for the megawatt plants.

Our manufacturing facility is fully established at 50 megawatt per year and our distribution partners and service capabilities are in place.

Going forward, we will focus on developing sustainable, that is ongoing and predictable markets, further reducing product costs and manage cash consistent with market conditions.

We are monitoring units operating at customer sites around the world at key target applications that we believe have the potential to develop into sustainable markets such as universities hospitals, hotels, office buildings, telecom centers, manufacturing facilities, wastewater plants and, of course, the U.S.

Coast Guard, which we recently dedicated.

Our initial experience with these customers is helping us prioritize opportunities which will enable us to better develop and forecast order flow.

We have also formed value engineering cost out teams to reduce product costs in all areas, manufacturing, engineering, technology and balance of plant.

Based on cost out performance to date, we believe the cost targets in our business model are attainable at the various volume points in the model and the current market prices are higher than our model predicts.

During the second fiscal quarter, we delivered three DFC 300 A power plants to customer sites, including Nippon Metal for Marubeni Corporation in Japan and the U.S.

Coast Guard and the Sheraton Edison Raritan Center for our U.S. partner, PB&L Energy Plus.

We also delivered 4 sub megawatt fuel cell stacks to our European partner, MTU/CFC Solutions, with customer site announcements to follow by MTU during the summer.

Since the close of the quarter, we shipped additional sub megawatt power plants to the Harrison Coal Mine in Cadiz, Ohio to operate on coal mine methane gas.

We shipped two units to Zoot Enterprises in Montana for PP&L for a data processing application and the Terminal Island Wastewater Treatment Facility for the L..A.

Department of Water and Power, our first power plant for waste water treatment on the West Coast soon to be followed by the megawatt King County plant in a few weeks.

We expect to ship eight more power plants through the summer, including our first 1 megawatt plant for King County as I mentioned and our first 2 megawatt plant for the Wabash River coal/gas site in Indiana.

In addition, we expect to ship DFC 300 A power plants to the Sheraton Pacifany in Ocean County College or PP&L, the City of Fuoco Municipal Wastewater Treatment Plant in Japan, as well as one additional unit for a so-far unannounced site for Marubeni.

Another unit to L.A.D.W.P., which we expect to go to the Los Angeles International Airport, and the unit for Peabody Museum at Yale.

We announced four new customers for our power plants since the end of last fiscal quarter, American Municipal Power in Ohio, which is a grid support application for Municipal Utility, and is our first power plant sale through Caterpillar as well as our first grid support application.

This unit will ship in the fall.

Terminal Island, as I also mentioned, as well as the unit at Yale, and Grand Valley State University in Michigan, a combined heat and power unit for its energy institute building, which also is expected to ship in the fall.

Other pending products that we have not included in our back log include the Sheraton New York Towers in Manhattan and two units for Pepperidge Farm in Connecticut through PP&L, and Suni at Syracuse, New York through Caterpillar.

Funding from the legislate agencies has been approved but discussions are ongoing to resolve utility-based issues such as grid interconnection and standby and back up charges to reach final contract terms with each perspective customer.

We're making progress in our discussions and we're confident the issues will be resolved but it has been a struggle, the ongoing battle between distributor generation and the local utility.

In May, the DOE selected us as the prime contractor for its SSECA program, its Solid State Energy Conversion Alliance subject to the final contract negotiation which we will complete this summer.

The goal of the SSECA program is to accelerate the commercialization of low-cost, high-temperature, modular solid out pack fuel cells over the next decade.

DOE selected us because of the advanced state of development of our high temperature DFC carbonate technology, our systems development expertise and manufacturing experience and our progress in commercialization efforts of the DFC power plants.

We have strong partners with companies like VersaPower, Materials and Systems Research, University of Utah, the Gas Technology Institute, and the Electric Power Research Institute, as well as DanaCorp Pacific Northwest National Lab.

We have more than 80 years of solid oxide development experience in our team.

I might add the engineering and technological developments in this SSECA program can also be used to further advance our DFC carbonate technology.

This is a 10-year, $139 million cost-share project with three phases.

The first phase, a 3-year, $24 million program that will be cost-shared by DOE and the team.

The structure of this cost shared contract is such that we don't believe it will have a negative impact on our cash flow over the 3-year period.

We expect that any eventual high-temperature application such as remote sites telecommunications backup, mobile, standby and auxiliary power units will be complementary to our existing DFC products.

We received three commercial product certifications for our power plants that will make it easier for customers to qualify for funding incentives and install our power plants for on-site power generations.

These are the ONCI National Safety Standards, the rules 21 grid interconnection in California, and the CARB 2007 emission standards and the declaration that our products are quote, "ultra clean" in California.

These certifications will significantly reduce the complexity for DFC power plant installations avoiding costly external equipment procurement requirements requirements and extensive site-by-site as well as utility-by-utility analysis.

We're confident that these three certifications will accelerate our business opportunities in California for all of our distribution partners as we're now eligible for key state funding programs with over $100 million allocated and available this year in several programs.

Also, regarding California, yesterday we announced the addition of a new market development partner, Alliance Power, an accomplished company in developing clean, distributed generation projects.

They have the expertise to perform all aspects of multi megawatt power plant implementation, including sighting, planting, permitting, designing, constructing, financing and operating.

With 120 megawatts of DG projects in California, they have a demonstrated track record in a state that needs clean power supply additions.

I have already mentioned that we have essentially completed our near term product strategy for our DFC 300 A products and are now focusing on cost out in all product areas.

Our megawatt class products are now rolling into the field, and while behind the sub megawatt-class, many of the lessons learned on the sub megawatt products are directly applicable to megawatt class products.

An example is the control algorithm for operating on digester gas or pea-shaped gas or many of the serviceability and maintainability processes.

Our DFC 1500 module is currently operating in our Dorrington facility and will be shipped to King county upon completion of final site preparation in Seattle.

The first of two megawatt modules for our DFC 3000 is currently being tested and the second megawatt module will follow it.

The balance of plant is undergoing factory acceptance testing at under sites for mission critical sub systems prior to shipment to Indiana later this year.

We continue to see that the macroeconomics, geopolitical and industry specific events that have kept capital spending at reduced levels and have impacted our order flow.

The drivers for clean, efficient and reliable on-site power generation, however, remain intact.

Multiple states such as Connecticut, Massachusetts, New York, New Jersey, Pennsylvania, Texas, Ohio, California and Michigan are furthering legislative efforts to encourage clean, efficient and reliable DG applications.

The proposal in Connecticut, for example, passed by the Senate and the House and awaiting the Governor's signature, increases price caps on electricity prices to stimulate competition and requires utilities to draw more energy from renewable sources such as fuel cells.

Congressional proposals to the energy bill have set forth incentives for fuel cell power plants while it remains to be seen when the energy bill will be passed, there are multiple clauses in that bill that would stimulate fuel cell orders.

The federal government continues to show increased interest in the hydrogen economy and the hydrogen fuel cells with the primary focus on homeland security, energy independence, and improving air quality.

Similar positive government action is being taken in Europe and Japanese target markets to encourage fuel efficiency and to reduce carbon dioxide emissions.

We're also beginning to see infrastructure problems arise again as we enter the 2003 summer cooling season.

Last week, California energy officials declared a power emergency due to an early summer season equate.

Despite projections of adequate capacity available to accommodate demand, there simply was not enough power in California.

Last month, the ISO New England noted that despite adequate forecasted supply for the region as a whole, the outlook for Southwest Connecticut and other parts of New England remains cautious due to the inability of transmission lines to carry enough power to meet demand and transmission outages.

Similar supply problems exist in Japan where 17 nuclear power plants have been shut down.

The president of Tokyo Electric Power in his April 2003 letter to shareholders explained there is a severe situation concerning electric supply and demand, saying supply capacity would run short in the summer season without the resumption of nuclear power plant operations.

To summarize where we are, we have essentially completed our near-term product strategy of standardizing our products and have identified and implemented early cost reductions.

We're seeding key target markets worldwide with our DFC power plants and monitoring their performance.

We are focusing on developing sustainable, ongoing, and predictable markets for our products such as hospitals, universities, hotel and the likes.

We have begun cost out programs on all areas of our products to value engineer cost reductions.

At some point, product cost reductions and market development will result in opening up substantial markets for our products.

In the near term, we will be assisted with funding incentives to bring the cost of our products down to the $2,000 to $3,500 per kilowatt that we know is competitive today in selected regions around the world.

With $180 million in cash and our strong financial position to execute on this business strategy, under current market positions, we're driving our quarterly cash burn, as Joe mentioned, to seven to $10 million which we can sustain with an annual volume of 5 to 7 megawatts which we believe is certainly achievable and still retain the core organizational strength to allow us to ramp up as additional orders materialize.

We have the financial strength to be flexible under all market conditions and expect to remain the leader in stationary direct fuel cell products for commercial and industrial customers.

With that, operator, we are now prepared to open this conference call to participants' questions.

At this time time, I would like to remind everyone if you would like to ask a question, please press star then the number one on your telephone keypad.

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

Your first question comes from Jarett Carson of RBC Capital Markets.

Hi, good morning.

Morning.

Help me understand the R&D contract costs.

I can understand that you didn't see additional revenues owing to the appropriate agents issue, um, relative to last quarter what transpired that we saw such dramatic increase on the R&D cost side?

Jarett, I think what you have happening is there is a product mix.

Two things are happening.

One is that we did not get revenues that we expected for this year, and let me just reiterate these are contracts that have been appropriated to us, um, if you look back at our history, we go through certain periods where some revenue might be delayed or deferred, and that we expect that the deal refunding that we did not get for the remainder of this year, will be reinstated at some level next year.

We're expecting between 5 and 8, and the same thing for the Navy contract.

Okay.

The DOE contract is, I said, we talked about to the past., a very favorable contract for the company.

In essence, a long-term contract and has, in effect, a margin to it.

When you take the margin out, what happens is the cost share, the impact of the cost-share contract actually increases.

I think the only thing going on in the numbers in the quarter is we didn't get revenue related to the Navy contract and -- and the, um, the DOE 33 contract that has an impact on the bottom line.

I might add, too, Jarett, and we talked to both Congress and DOE and, you know, the turmoil of the times, the Iraqi situation and the like, it was a little bit surprise to us, kind of fell through the chairs, if you will, from a visibility standpoint, um, but, you know, this main contract, the BDI contract has been going on for about nine years now, and we feel relatively confident, as confident as you can when dealing with Congress and the Executive Branch that it will be made up next year, and we feel just as confident the Navy issues will be made up next year.

So on a go-forward next couple of quarters, um, you did about 7 million in contract costs in the first quarter and we're at 11.6 this quarter.

Which one of those two numbers do you think we'll be closer to the next couple of quarters?

I think you're looking at the higher numbers, Jarett.

I think what you have coming through on the revenue line now is the cost-share contracts.

I think Clean Coal is the primary contract that would be coming through, so I think the impact, is um, you get revenue and we don't have the DOE contract for the remainder of the fiscal year, anyhow, to offset that.

I think the numbers will be in the higher range.

Okay.

Um, related to the, um, the head count reduction that you had, how much were the severance costs and, um where did that show up?

The severance costs were actually fairly low.

We're estimating the severance costs were at about $300,000.

Um, that shows up in SG&A, so I think you will probably notice that the SG&A increased this quarter over the last quarter, so you have not all of that severance cost came through.

I would say about two-thirds of the severance cost came through on the SG&A line.

That's where it sits at this point.

Alright.

And, Jarett, we expect off of that reduction, which is approximately 9, the work force reduced by 90 people, we're expecting on an annual basis to reduce to this, around five to six million out of the, um, -- so in effect, given all the circumstances that happened, we affected, you know, the beginning of the cost reduction process.

We're still delivering units into the July quarter, um, so I think you still have costs coming through of the delivery process.

And then you will start to see in the fourth quarter getting our achievement of the 7 to $10 million cash burn.

Certainly, you know, definitively in the first quarter of '04.

Okay so we -- the -- do you think there will be a, um, an improvement in -- most likely the cost of goods sold -- a slight improvement, perhaps, in the cost of goods sold number in the third quarter, getting better into the fourth quarter and into '04?

Yes, everything seems to happen gradually and I think that is how it will work out.

Okay, thank you.

Okay.

Your next question comes from Chris Kwan of TD Securities.

Hi, guys, just a few questions.

Um, first, what is your order backlog sitting at right now?

The order backlog right now, as of today, is about 9 1/2 megawatts.

Um, I'll further break that down. 5 1/2 is related to the commercial/product side, and 4 megawatts is the R&D contract side.

And when will that -- all of those be delivered approximately what time?

We're expecting that in the government side, this 4 mega watts of backlog, three megawatts, the Clean Coal, the Vision21 -- I'm sorry, Clean Coal and King County will get delivered this year, and the U.S.

Navy and Vision 21 will be delivered in '04.

On the commercial side, we have about 2 1/4 will be delivered, um, this year, and then the remainder will be delivered in the following year.

2 1/4.

2 1/4, 2 1/2, it is a little bit on the bubble.

Okay.

And, um, your cash use in the quarter was 20 million.

You kind of alluded to it with Jarett's question, what do you see the cash usage for the year going in?

I'm going to estimate that the cash usage for the year will be somewhere in the 25, the remaining cash for the next two quarters will be about 25 to 30.

So, what you have, you have is 40 coming into the quarter, giving us a 65 to 70, you know, pretty much where we have been in terms of the annualized cash flow.

Okay.

Then just a little bit on the SSECA contract.

It's a cost share program and yet you don't see an impact on your cash flow.

Could you -- I don't see how that works.

If you're going to have to contribute 50% of the cost, where is the rest of it coming from?

Well, first, Chris, this is Jerry.

It's not a 50% cost share.

Phase I is, if I recall, about a 20% cost share.

Then it depends on the mix of what we do and our partners who are-- we are the prime, they're the subcontractors, um, and you know, we have to see as we finalize the contract.

There is certainly not a material cash impact.

Now, as you go to phase 2 and 3, the cost share amounts go up and then we would see a cash impact of that, but, um, keep in mind when we do, particularly when we do labor, technical labor in these contracts, you have got the G&A markup on government contracts that has picked up.

So, we don't see it in phase I, but in phase 2 and 3, we would see a cost share.

All right.

Of course, phase two and 3, two points, one is, we don't have to go far if we don't want to.

The second is we're competing with five other teams and DOE has, there are six strong teams going after this work.

I'm sure there will be a down select at the end of phase I and another down select at the end of phase 2.

That's the typical way DOE approaches it in long-term projects like this.

All right.

Okay.

The final question on the, um, on the costs of products sales, um, looks like quarter-over-quarter, you're still in the 3, 3.1:1 range of cost over revenues.

So, you haven't seen any improvement in that.

When do you expect to see that number start coming down, or that ratio coming down?

Chris, we're still in the one-off process.

Our costs will really remain at the 1:3-type ratio, you know, through the delivery cycle of the class.

What we need is, you know, we have been, in terms of watching this business, we, you know, we're trying to get more volume to come through the facility.

Um, what we see is that, um, our cost reductions, our value engineering efforts, the efforts of our partners and cost reduction appears we can get down the cost curve as we have been describing.

The challenge we have right now is that with really no volume, no ability to volume purchase, um, you know, it's just difficult.

Everything stays in the one-off category, and this is where we are today.

So we need to have happen, and as Jerry said in his comments, we're going to accelerate some of our value engineering efforts, we'll be able to bring the costs down.

Like I said, some of the partnerships have been somewhat optimistic about the cost reduction efforts that the costs will come down in line with order flow.

I think the other thing, Chris to point out, is we have been seeding the market.

I mentioned all the target markets where we see the need for base load power that we can produce, whether it's telecoms, factories, or wastewater plants or hotels or universities or hospitals.

If you look at it, we have units going everywhere around the world into each of those applications plus some others.

We don't need any more one-offs.

We need our first hospital, we need the first hotel.

We want the first military installation with the Coast Guard.

We want the first data processor, and with Zoot, et cetera, et cetera.

We don't need the second, third, or fourth unless we believe it's a sustainable, on-going and predictable market.

So, the focus now is now that we got the seeding, it is not out but over the next six months, it will basically be out, and we monitor performance and getting customer reaction, you know, the focus now is continuing and accelerating cost reductions because we have the DFC 300 A operating and now we want to reduce the cost and maintain the operability.

The second thing is, which of these markets could be the right ones to target and what kind of on-going volume.

What we need to know is it a 20 megawatt a year marker or 10 a megawatt a year market or 30, or 4 or 5 megawatt a year, that's the kind of things we need to know and we'll build the standard rather than building one off type of products, and then you will see a dramatic change between the cost of sales and the, um, and the sale price.

Right.

Last question for you, Joe, um, you gave a range or revised range for government R&D.

Remind on the product side, what is your range?

The range is effectively to take the 2 1/4, 2 1/2 megawatts, um, and you just price that out at kind of the $3 to $4,000 a kilowatt and we are kind of a 6-8 range for that.

Okay, perfect.

Thanks a lot.

Your next question comes from Eric Prouty of Adams, Harkness & Hill.

Great.

Thank a lot.

Joe, can you give us a little more detail on the state R&D incentives that you received, um, will that be repeated in future quarters or was this just a one-time event?

It's possible that it can be repeated.

It's a state incentive to do new research and development activities.

It's in the state, at this point, in the state of Connecticut for all of our R&D work here, between Currington facility and the Danbury facility.

That was actually a large credit.

The way the credit works is that you have to increase your R&D on an annual basis year over year.

The biggest impact will be this, 1.4 million number and that we will be looking in future years to get some kind of an incremental number, which will be smaller.

Great.

And then a couple other small follow-ups on inventories went down, a decent clip quarter over quarter.

Was that due to shipments, was there any write-offs in the inventory line?

That's pretty much due to deliveries, um, in the quarter.

What -- what happens, remember, Eric, one is that inventory, part of it is shipments, and as inventory, some of it has gone to contract accounting.

Right.

Okay, as you finalize, as you move it out of inventory, some of it will go to contract, um, and so some of it is delivery.

Some of it is also our contract accounting.

Great.

And finally, an update on capacity.

Sounds like you have your 50 megawatt manufacturing capacity, what is the capacity with the current head count?

Um, somewhere in the 15 to 17.

Okay.

Great.

And that's an annualized number?

Yeah, that's an annualized number.

Eric, what we go by is on stacks per week.

A stack is good to go on.

Sure.

A stack a week is 12 1/2 megawatts.

What we mentioned earlier about where we could get down to 5, 6, 7 megawatts, that's about a half a stack a week.

You go below that, you lose your volume production but we see very little risk we won't get five or six megawatts per annual period, and we can go up today about 1 1/2 stacks a week, so, with the head count and we have the machinery and equipment to go to 4 stacks a week, which is 50 megawatts a year, so that's kind of how we -- we're playing it.

Great, thanks a lot.

Your next question comes from Mike Harris with Robert W. Baird & Company.

Good morning.

Jerry, can we get just a little more detail on how the sub megawatt units are running out in the field?

Generally speaking, are they running at expectations, ahead of expectations, just a little more detail there?

Well, they're running at expectations.

I don't think any technical organization would ever agree that things are ahead of expectations from a technical standpoint, and our expectations have to do with output rating and they're running at the 250, which is our nominal rating.

They're at that level, they're running at the efficiencies, both committed in contract and what we expect which is in the high 40s, 47% range, um, and the other key issues, their reliability factor, and they're running at the availability of 95% that we expect.

There is, obviously, a lot of nits and lice primarily in the balance of plant, water treatment systems are a headache, they are for any equipment, and a lot of the electronic controls, control cards, things like that, um, flushing out the algorithms to make sure they're all the same.

Keep in mind if you want to run these unattended, it's much more important that you get consistent, stable performance.

That's why we're monitoring these on a 24/7 basis, building up our database of mean time between failures for all the proponents so we can stock spares accordingly, mean time between course removals so that we can replace those components with different vendor components.

You know, our vendors are monitoring this also because this sets the tone of whose components we're going to use in the long-term by monitoring fleet performance, you know, having guys from GE, United Technology, other companies like that who have been involved in new product introductions before, my question is always the same: Is this any different than putting an engine or turbine or any other new product out in the field?

And they see no difference and we are not tracking it any different.

I think a key part of that is Caterpillar.

They've come through for both serviceability and maintainability audits, they track our operating numbers of the fleet just like we do, we send them the data as does MTU and as does Marubeni.

Well great, that update was very helpful.

Switching gears here, I want to confirm there were two new orders in the quarter, the Caterpillar order and the Grand Valley State order?

That's correct.

Okay, and then -- well, obviously -- And the another remains a disappointing, up to this point, part of the reason, well, a lot of the reason why you did the head count reduction.

I just wanted to kind of gauge on recent trends and quoting activity relative to say, let's say, 3 to six months ago.

How is that tracking?

The -- you know, we -- Caterpillar's quote "activity" is greater than it was three months ago, PPL is about the same, they are trying to close some projects they have already got, like Sheraton Manhattan and Pepperidge Farms.

Quoting activity in California while it's been greater, the fact if you -- without these, um, certifications, um, you can't tap the public funds that are out there.

Sure.

Massachusetts was seeing some good activity there because their renewable energy trust, I think, which partially funded, um, funded the Coast Guard is active and that money hasn't been tapped, you know, some of the states are trying to tap some of these clean energy funds for state budget scenarios.

Good activity in Europe, um, that hasn't been announced yet, but as I said, we shipped four stacks during the quarter for MTU, three of which they have homes for now, but not ready to announce it and it's their job to announce it.

I see good activity, quoting activity in Japan, that point I made of the Tokyo Electric Power saying they're in deep yogurt this summer because of the nuclear plant shutdowns ripples through that whole economy.

Okay.

All of that is well and good, but I want to see orders as does the market and, um, we think it's there, but I want to see orders that we can then predict the market for next year and the year after and the year after so we can get our manufacturing guys going towards a standard manufacturing approach to inventory rather than kind of one-off-type scenarios.

That's very reasonable.

Okay, that's helpful.

Then, I wanted to confirm that currently to date, there are 10 installations or sites that are up and running.

Let me -- let me go through.

We have two in Japan, we have, how many, six in Germany.

That's eight.

We have in the U.S., L.A., Mercedes, Coast Guard, Sheraton Edison, Los Angeles Terminal Island, Los Angeles Headquarters Building, how many is that in the U.S., about six?

So, I think there's about 14 or 15, if I recall.

That are currently running today?

Yeah.

Okay.

All right and -- okay.

In addition, every unit we're going to ship the 12 are going to ship during the summer.

Probably eight of those are in operation in our backyard here prior to shipment.

We run them full bore and do all kinds of testing before shipping them out to the customers, just like the megawatt plant up in Torrington which is operating now.

Okay, um -- .

I'll get you a detailed list, I am just going off the top of my head.

I didn't think that many, um, obviously you made nice progress in shipments, um, in the last quarter plus, I just didn't realize that many were up and running.

So, that's great.

I get a morning report as does all the management from the field on how they're performing.

Keep in mind, too, that we can from here, we can measure or monitor performance in Europe and Japan from, um, PCs here in Danbury, as well as the Coast Guard and L..A. or wherever.

Okay, great.

That's all I had.

Thank you.

Uh-huh.

Your next question comes from David Kurzman from H.C.

Wainwright & Company.

Good morning, everyone.

Um, a couple of things.

First, a couple of housekeeping, Joe, the rise in interest income, was that due to a gain on sales securities, treasure securities?

No, actually, um, the other income line has the R&D credit.

R&D.

I'm sorry.

Yeah.

Okay, um, let's see the -- now, for the SOFC revenues, I assume there will be none this year, and we'll start up in next fiscal.

I'm not sure, David.

It certainly won't be substantial.

But, um, you know, we expect during June, July to finalize the contract, usually takes about 90 days and depending on when we finalize it, with our October 31 fiscal, I don't expect anything substantial but there should be some kick-in.

Okay, when I look to Cat and Ingersoll and Cummins and GE, everything they're saying about the backup in peak power markets, sounds pretty bleak.

In fact it's, um, -- I'm beginning to wonder if GE 75 gas turbine units for next year is even a little high, um.

It suggests to me that with capital utilization being in the mid-70s, and the states hurting for tax dollars, that this is going to be a difficult period over the next 12 to 24 months.

What can you do to show that you're taking the right steps to get the new orders?

I mean you're -- you went through the quoting activity, but are there any sort of other steps that we can get guidance on?

Yeah, let me -- yeah, stand back.

Obviously, whether GE is going to ship power based turbines, I don't really know or really care, um, the difficulty and all the bleeding in the power industry, the Calpines and the [Merans], they're all merchant-power guys, okay, while there has been a glut of new generators put out in the marketplace, when the spark spreads, they're in financial trouble, you know, high gas prices and low electricity prices are not good if you're a merchant generator.

We're not a merchant generator, okay, we're a distributed generator.

No matter how much power you got out there, if you can't get it to where the users are, it doesn't do you a darn bit of good.

That's what I think is being overlooked.

What I mentioned in my comments.

ISO New England saying there is a bunch of tough spots, depending on the summer heat wave in New England.

There are spots in California.

So, um, having all the generation capacity in the world, um, doesn't help necessarily get the kilowatts where the people are, and transmission, um, adding to transmission is darn near as difficult as adding new generators.

The other thing that I would comment on is that besides just citing the transmission is when don't -- the companies that react when they don't have adequate transmission, which means their shortage and their distribution systems, they typically react by renting equipment, okay, um, Caterpillar has rental fleets, GE has rental fleets as do others.

It turns out, in talking to quite a few of the companies, our numbers pencil out great against the price of rentals.

Rentals are the most expensive way to generate power.

If you notice, I think there is 80 megawatts going into Southwest Connecticut, 200 megawatts going into Long Island.

Gosh knows how much there is in California.

So, I think we're expecting companies will wake up and say we can avoid this rental scenario by putting in base load plants near the customers that are in the grid where we can site them, okay, that is kind of how we see it.

You're absolutely right about the head wind in the face.

That's helping us.

The other part helping us, we expect to see the whole homeland security scenario playing out in favor of distributed generation, I think there is an understanding that a lot of small power plants are a lot more secure than a few large power plants.

I think that will be working in our favor.

If we can ever get an energy bill through Congress that mandates, the government as a buyer of fuel cell electricity, that likewise would help towards incentives, so I think that you're right, there is a lot of head wind out there.

We have a lot of good things going on in our favor, and we can look in Europe and Japan also.

So, you know, how that translates exactly to a sustainable market is what we're trying to determine because we don't want to ramp up to build a lot of units if it's not an ongoing market.

We would rather conserve our cash and wait until the picture gets clear.

Don't know if I made it any better for you, David, but that's kind of how I see it. [ Laughter ]

Let me follow up with a question from the amount of time that from when you receive an order to when the plant is installed and up and running in the customer's hand.

Can you give us a sense of how long a period that is that is and where you expect to get to?

If we're doing nothing -- the stacks we can produce quickly, obviously.

Right.

A balance of plant.

Look at the sub megawatts if we don't have any on backlog.

I would say a new sub megawatt plant is four to six months installed up and running because, I mean, we can ship them out.

If the customer site's ready, we can literally deliver on Saturday and start heating up on Monday, okay?

On the megawatt plant, the installation is a little longer and there, we would look at a probably a nine-month type cycle.

What we're telling new customers today is 12 months after receipt of order, but in reality, we believe we can deliver even the megawatt class plants in nine months today.

You brought up the issue before of the rental fleets, you have good economics.

The thing that rental fleets have is for quick deployment.

This requires a bit more of a cell cycle to get them to swallow a 4 to 6 or 9-month lead time.

Right, if you don't want to be buying that hundred megawatt unit next year, I'll tell you, I talked to our good friends at Cat, that is the best product.

They would love to sell you rental equipment all day long.

Of course.

If you ever want to get out of that trap, and you're the local wire's utility company and you can't put in new wires to bring in power from somewhere else, your two choices are to put in distributive generation like ours and mitigate that against the cost of the rental fleet and eventually get out of that rental fleet scenario, or string new wires.

I can tell you from everything we have seen, David, not just in the U.S., stringing new transmission lines is not only damn expensive, but gets a lot of public --

Yeah, it's next to impossible.

That's the way I would look at it.

Okay, thank you very much.

You're quite welcome.

Your next question comes from Sanjay Shrestha of First Albany.

Hi guys, how are you?

Three quick questions here, you're looking to take a cash burn down to 7 to $10 million of by the first quarter of 2004.

Joe, I was hoping you can talk a little bit more about that?

What are some of the expectation going into your planning there?

Like, you know, whether you're going to be receiving the revenue from the government side or not, from the cost reduction, the head count reduction.

You can talk a little more about that.

I'll give you more flavor, um, we expect what we're doing is in the third quarter, we're finishing off a large portion of the delivery cycle, um, you know, in effect you have got 4, 4 1/2 megawatts, um, being delivered over the summertime.

That leaves us some product revenue for next year, um, it also reduces our expenditures on any balance of plant that is in the marketplace, so what our strategy is to get our run rate into a position where we can manage this business without affecting the core.

Okay.

To a 7, to a 7 to 10, um, million-dollar level, which will be, you know, part of that equation is, and we can adjust to this.

But right now, part of our equation is that we will expect a certain level of government funding, um, to come in.

But as the markets dictates to us, you know, what -- what circumstances exist in the marketplace, we will adjust, um, we will adjust to get to that number depending on the market conditions.

So, you know, in one sense, we have flexibility.

All we're trying to do is create a path where we can flex to the marketplace.

We're not locked in, um, we have an expectation level, which we're going to keep the core of the business.

Sure, sure, that's the right thing to do anyways.

As the market changes, we will adjust, and we will drive the business, we will drive the cash down.

We're firm believers that this business will take off once market conditions improve, and we're seeing -- we're seeing those signals right now.

We don't feel at this point it makes any sense to do anything further than that, so we're going to kind of guide this business, it's in position.

Okay.

We can take orders and we can launch, um, and that's what we're building for.

Okay, that's fair.

That's fair.

Now, the next question is, I remember, Jerry, you mentioned about the sweet spot being in $2,000 to $3,500 per kilowatt.

What kind of a time frame are we talking about to get to that sort of cost point?

Somewhere, at about a half a stack a week.

Somewhere between 5 to 7.

Okay.

We know we can get orders at that basis.

We looked back at 12-month period and we know we can get orders at that level.

I'm not concerned about that.

At that level, you're really getting no cost advantage from volume.

You're absolutely not, and we're keeping, they're not over sizing organization, we're keeping the core of the organization ready so that we can ramp up quickly with market conditions.

Okay.

And we do those two things, we can get our cash burn down into the seven to $10 million a quarter.

Okay.

But we're still selling products at a loss because -- not because we're not getting cost out, we just don't have volume to help us.

Agreed.

Agreed.

Okay.

The two to 3,500, um, we know what that is based on our partners getting orders with certain percentage levels versus what we are being paid for our products.

We can work into that, depending on whether it's California, New Jersey, or Massachusetts or whatever.

Okay.

So we know what the market clearing price is, of course it varies in each state.

Okay.

At 50 megawatts a year, we're at that $2500 to $3,000 price right now.

Okay.

Got it.

So, we're -- we believe we're ahead on that cost curb, um, we have obviously taken the low-hanging fruit.

Now, we put together a formal cost-out team, which is what all the companies do.

Okay.

And it's a way to take your existing products and value engineer cost out of it.

So, but you still at the end of the day have to have the volume.

Sure, okay, that's very helpful.

One last question, if I may.

Can you give us more update on your Vision21 program related to the hydro power plant.

The DFC power plant is operating in the back?

Yup.

We have had some mechanical problems with the Capstone turbine.

Capstone's working very well with us.

We can't get the capacity out of it that we think we can get out of it.

The combination is working good.

We're doing all kind of, um, of tests on it now.

Parametric tests on various levels and various events and so forth so that it lays on out in this proven concept side, what it one in the larger side.

The second calendar half of the year.

Okay.

Is where we will start seeing acceleration on actually seeing the Alpha DFC turbine, part of Vision 21 extension.

From where -- we're probably three months behind the accelerated schedule, we're probably three to six months ahead of the DOE schedule.

Okay.

We're still in good shape with that, um the actual unit wouldn't be built until fiscal '04, the first Alpha unit.

Okay.

The second Alpha unit is the one that we build and ship to Montana for field testing.

Fantastic, looking forward to that.

Again, thanks a lot, guys.

Your next question comes from Bill Naskovitz of Heartland Funds.

Yes, good morning.

Morning.

Say this digester market seems to be of interest.

Could you give us a little more color on the potential there and what you are specifically doing from a sales-and-marketing standpoint to you know, do business, real business there?

Thank you.

Wastewater treatment.

What makes the digester a wastewater treatment market interesting is that when you put a fuel cell on digester gas, it is a renewable since the gas comes from biological sources, it is as renewable as solar and wind.

So, that makes -- puts it into a whole different category than when you're running on natural gas.

Most wastewater gas have about the energy content as natural gas.

So it is really good fuel.

The strategy multifold in Japan, there is a huge effort on wastewater treatment, um, municipal and industrial, to, um, to enhance dramatically the number of wastewater plants and of course, that use of the energy from the wastewater plants.

In the U.S., um, the municipal wastewater treatment market, there are 4 to 500 wastewater treatment plants with a megawatt of gas or better.

The one in Seattle we are going to is a 4 megawatt stream, we're only using a 1 megawatt split stream.

That's a market we won't tackle until the environmental regulations are tightened, um, many of the wastewater plants are either burning the gas or just flaring it.

When you flare this digester gas without burning it, it's got 23 times the CO2 impact as just -- as even burning it.

Of course, when you have burning you have air pollution issues.

Most large wastewater plants are around large urban areas that have air pollution issues.

Our strategy is to get one at the Terminal Island in L..A., to get the megawatt plants in Seattle, that is partially funded by the EPA, put a full-court press on the EPA and local communities to look at this as a source of clean energy and that can be used in Japan, Marubeni's primary focus is wastewater treatment.

There, they started with Kirin which is an industrial application.

Kirin has 18 more plants plus they control San Miguel in the Philippines.

Kirin has told us this thing works good and will represent all of our plants.

So, the other big market that we haven't gotten near at all is the pharmaceutical industry uses a lot of wastewater treatment.

We just haven't had the resources to go after that.

That's kind of it in a nut shell.

Does any of your literature talk something about the CO2 cleanup potential?

Yes, it does.

In fact we have a -- Steve, why don't you send Bill this -- King County's got a four-page brochure where they're talking about this, they are making a big thing out of it.

I think it is a big thing.

What my ideal would be and I have seen EPA do it before, once you demonstrate a new technology, the best of it, BACT, best available control technology, then they will ratchet down the regulations which then they would require wastewater plants to put in -- to use the energy and do it cleanly rather than burning or emitting it.

Thank you, good luck.

Thank you.

Your next question comes from Gary Schwab of Janney Montgomery Scott..

Thanks, my question has been answered, thank you.

We'll take one more question, operator.

If there are none, it has been an hour, we'll close the call.

Are there any others?

At this time, there are no further questions.

Ladies and gentlemen, we have reached the allotted time for questions.

Are there any closing remarks?

No, thank you very much.

We'll talk you to you next quarter.

Ladies and gentlemen, thank you for participating in today's conference.

You may now disconnect.