燃料電池能源 (FCEL) 2003 Q4 法說會逐字稿

Good morning.

My name is Jill and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the year end 2003 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer period. (Operator Instructions).

Mr. Esbach, you may begin your conference.

Thank you very much and good morning.

My name is Steve Esbach, I'm the 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 fourth quarter and year-end 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 and 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 now like to turn this call over to Jerry Leitman.

Thanks, Steve.

I'd like to also welcome everyone to this call to review the quarter and the year end.

First, Joe Mahler will review the financial results.

Joe?

Thanks Jerry and good morning everyone.

Fuelcell Energy reported a net loss in the fourth quarter of 2003 of 15.4 million, or 39 per base -- 39 cents per basic and diluted share.

This compares to a net loss of 20.7 million, or 53 cents per basic or and diluted share during the same quarter of the previous year.

Product sales were slightly higher than in the prior year on lower product costs and our focus is to continue that trend with our cost reduction programs.

R&D revenues and contract costs were lower in the quarter.

Revenue for the fourth quarter of fiscal year 2003 was 7.3 million compared to 13.7 million for the same quarter of the previous year due to reduced government research and development funding during the quarter, offset by slightly higher product revenue.

Net cash used during the quarter was (technical difficulty) included an investment of 1.5 million in Versa Power Systems and approximately 500,000 in transaction costs associated with our global acquisition.

Cap expenditures were 1.6 million and depreciation was 1.5 million during the fourth quarter.

Net loss for the fiscal year was 67.4 million, or $1.71 per basic and diluted share compared with a net loss of 48.8 million, or $1.25 per basic and diluted share in the previous fiscal year.

The fiscal year's loss reflects our continued investment in the standardization of our DFC power plants, investment in shipments of PFC power plants; operating costs, which include employee expenses, sales and marketing costs and depreciation increased as we continued to invest in bringing products to market.

Revenue for the fiscal year ended October 31 was 33.8 million compared to 41.2 million in the previous fiscal year.

Product sales and revenues increased to 16.1 million in 2003 from 7.7 million in 2002.

This was offset by lower research and development revenues from 35.6 million to 17.7 million.

To clarify, 2002 R&D contract revenue included a large portion of our 1 megawatt and 2 megawatt power plants for King County and Clean Call (ph).

In 2003 under budgetary constraints, the funding of certain of our contracts was delayed by the government.

During fiscal (technical difficulty) 67.1 million of cash, including 6.6 million for cap expenditures, 1.5 million for the Versa investment and approximately 900,000 associated with our acquisition of Global.

This compares to 69.9 million in cash use and conclusive of 15.4 million in capital expenditures and a 500,000 investment Versa power systems.

Cash, cash equivalents and investments, primarily U.S.

Treasuries on-hand as of October 31 totaled 153 million.

With the November 3rd, 2003 acquisition of Global, we began the 2004 year with approximately 209 million in cash and investments. e reduced our cash consumption in 2003 from 20 million per quarter in the first half (technical difficulty) 13 million per quarter, exclusive of nonrecurring expenditures in the second half of 2003.

Going into 2004, we are increasing our investment in our cost-out (ph) program by adding 20 engineers.

Our goal is to significantly lower our volume requirements to achieve profitability quicker.

We also expect the additional cash utilization associated with integrating Global during the first half of the year.

Once integrated, our goal is to drive cash use for the combined company to approximately 10-12 million per quarter.

I would now like to turn the call back to Jerry.

Thanks, Joe. 2003 was a very successful year for us, delivering 25 units by the end of the fiscal year, generating orders and new customer commitments, strengthening our distribution network and advancing our high temperature fuel cell expertise and solid oxide fuel cell technology with the (indiscernible) award, the Versa investment and the Global acquisition.

We have solidified our position as the leader in stationary fuel cell power and have established a strong foothold for the continued growth of our business as we move into '04.

In looking forward, a key focus area is developing sustainable markets for our core BFC products.

As we continue to place additional units at customer sites across the world, we are establishing a base of key applications and customers for growth.

Our focus is on market segments that offer sufficient funding availability to make our products competitive with the local cost of electricity and co-gen (ph).

These markets include Japan, especially for wastewater treatment applications;

Europe, the West Coast and the Northeast in the U.S. and selected others.

We see these markets as a bridge to support order activity while we are at higher cost and lower volume.

As the results of our product cost reduction efforts kick in, we will move from these bridge markets to broad commercial acceptance.

Examples of these bridge markets that have contributed to orders are the two Sheraton hotels and Ocean County College installations by PP&L in New Jersey.

Funding came from the New Jersey Clean Energy Fund that enabled these DFC 308 (ph) power plant installations, the resulting cost savings to the end-user, the customer, and still profit for our partner PP&L.

The recent release of 3 megawatts of orders from Marubeni is another example with Japanese government funding provided the bridge to make our products competitive with the local electricity pricing and still allow Marubeni a return.

These orders were a direct result of the excitement generated in that market by our first unit at Kirin Brewery.

With the city of (indiscernible) in operation, JapEx (ph) starting up and Seiko Epson (ph) units shipping this month, we anticipate increasing order flow from Japan.

Because our DFC products (indiscernible) operate on wastewater treatment gas, a bio-mass renewable fuel, we provide one of the few sources of firm distributed power within the renewable portfolio of products.

This makes our fuel cells complementary to the wind and solar projects that are also funded under these programs.

We have three units operating on wastewater treatment gas currently and I expect the first one in Europe this year.

There is a lot of interest focused on the upcoming startup of the megawatt plant at King County by both the EPA and the wastewater treatment industry.

I expect increased funding availability as well as potentially tightened environmental regulations as we continue to prove our product's capability in this segment.

In some states like Connecticut, fuel cells on any fuel qualify as renewable because they're ultra clean and emit one-one thousandths the emissions of the grid.

This allows our products to be utilized in other target applications, like hospitals and universities, light industry and heavy commercial applications and still receive renewable incentives.

The first renewable energy credits were traded during the last quarter at a price of 3.5 cents per kilowatt.

We expect that price to rise.

As other states adopt the Connecticut model, renewable energy credits can be a significant multiyear bridge towards making our products competitive with the grid.

In California, the California Self-generation Program offers incentives for fuel cells in both renewable and gas-fired applications, offering exciting opportunities in a number of applications.

The recent version of the energy bill offers significant potential support for a broad market across the U.S..

This bill offered a number of incentives, totaling up to 3.5 cents per kilowatt hour that was an integral part of the project financing for several projects we've been developing.

While the bill has been delayed until next year, its passage would offer upset opportunity for us.

In Europe, our partner MTU faces challenges of a sluggish economy and declining energy prices.

Notwithstanding this, MTU is well positioned through its joint venture with RWE to take advantage of the opportunities as they arise.

The 5.11 euro cent incentive helps to offset the declining power prices to make our products competitive in Europe.

Finally, as another type of bridge, we see the federal government as a customer, especially for mission-critical facilities for the benefits of our DFC power plants can demand a premium over the grid.

This includes military bases, aviation facilities and other installations where on-site base load power is critical.

The government procures these products through an annual appropriation cycle that we are actively pursuing.

We estimate the funding for these markets is sufficient for over 1000 megawatts of potential fuel cell power plant applications over the next several years.

This will enable of couple order volume with our product costs reductions to exploit broad commercial markets.

Strengthening our distribution partner network in North America by adding Enbridge (ph) as a distributor of our products in Canada and the additional alliance power focusing in California broadens our potential customer base.

The introduction of the hybrid product by Caterpillar, a combined megawatt class power system that includes our fuel cell power plant with gas engines is a significant development for our product offering.

The advantage of this hybrid product is that our efficient DFC 1500 power plant provides the baseload while Caterpillar's gas generators provide the peak load and load following.

The end result for the customer is a clean, efficient total power system in more economical terms, but yet with a favorable environmental footprint.

The hybrid product takes advantage of a lower capital cost of the gas engines, making the total cost less than half the cost per kilowatt of the DFC 1500 alone and because the DFC 1500 operate with the emission levels were (ph) 40 percent less than generator sets by themselves.

We believe this provides a great opportunity for us to commercialize our megawatt plants direct fuel cell products.

While focusing on market segments that provide funding that bridges the gap between our product cost and grid electricity pricing is one key area, the other area that is just as important is reducing product cost to remove the need for funding.

We're pleased with the efforts of our cost-out (ph) program to date, identifying and incorporating cost savings of between 25 and 35 percent for both our fuel cell module and balance of plant (ph) equipment.

Our cost-out team is being very aggressive in its approach to identify the key areas that provide the greatest opportunity for cost savings without adversely affecting the reliability and performance of our products.

For example, to date, over 1400 cost-out ideas have been identified and over 50 percent of those have been evaluated for feasibility and cost-out potential.

Our first targeting the items with the highest potential cost savings and the shortest time to implement, we are on a path to significantly reduce product costs.

Due to our accelerated efforts in cost reductions, we achieved an 18 percent reduction in product costs during the last quarter alone and established very aggressive product costs markets for 2004 and 2005.

Let me give you a few examples.

One is simplifying the fuel purge system, resulting in the elimination, total elimination of some high-cost valves and BOP (ph) piping. (indiscernible) we did some design changes to allow the use of more commonly available and cheaper stainless in our BOP piping.

These two examples by themselves resulted in a 3 percent reduction in the BOP cost.

In the (indiscernible) plant, due to the qualification of multiple vendors for raw materials, component parts and balance of plant (ph) packaging for which we invested heavily over the last two years, we've been able to advantage of quantity purchase discount.

At our most recent purchase release, BOP packaging costs have been reduced by 24 percent.

While all of the organization gets involved in cost reduction, we currently have 20 percent of our employees dedicated to the cost-out effort and we will continue to invest significantly in the future.

When we won the SECA (ph) award in April, we saw an opportunity to strengthen our capability by investing in Versa Power Systems and by acquiring Global Thermoelectric's solid oxide fuel cell technology.

We're now at the point where we're finalizing the SECA contract and we can make decisions regarding the allocation of task, resources, location and staff and related facilities.

As we have stated, we will manage our SOFC technology development through the available funding levels. (technical difficulty) the global transaction, we also inquired their thermoelectric generator business that has looked (ph) to be a very good business, but is not a part of our core fuel cell focus.

We're currently exploring the monetization of this business and assessing if this is the appropriate course of action to take.

To summarize, we're pleased with the accomplishments we made in 2003.

We've established ourselves as the leader in stationary power and we will focus in 2004 on product cost reduction, on market opportunities that provide a bridge to broad commercial acceptance of our products and on management of our strong financial position, consistent with the business demands.

Operator, we're now prepared to open this conference call to any questions that the participants may have.

(Operator Instructions) Jarett Carson.

Hi.

Good morning.

Joe, on the product costs relative to pricing, we're at the roughly the 3-to-1 level this quarter.

Are we going to start to see maybe 2.5-to-1 and hopefully progressing towards 2-to-1 in the first quarter, progressing throughout 2004?

Yes.

We should start to see the results of our product cost-out programs.

We're still doing these -- my only caution, Jarett, is we're still doing these in somewhat of a one-off basis.

But, yes, all of our indicators are that we're moving down the cost curve, that we have the ability to reduce costs and we should be successful at it.

I would like to add too, Jarett, that as each of the cost-out ideas is developed, you automatically incorporate it in the next unit.

There are block changes where we accumulate several engineering changes and then incorporate that at that time.

So there is a lag effect between the cost-out being complete and the realization in revenues and profits.

Would we look to get under the 3-to-1 level, do you believe, in the first quarter?

I think there's still a lag there, Jarett.

So I think it will come out of the first quarter at somewhere between 1.25 and 1.3, and it should decline after that.

On the adding of the engineers, does that mean that (indiscernible) -- is that going to be in the R&D line, I guess where you (multiple speakers) that?

Does that mean we're going to see -- has that been going on or is that a new effort that we're about to start and what type of incremental increase do you expect that to generate?

Joe can handle this financially.

What we looked at was taking the whole cost-out team and looking at the number of ideas and which one had the biggest bang for the buck over the shortest period of time, and we were resource short.

So we're looking at 20 engineers -- they're not scientists, we're looking at engineers in multiple disciplines so we can take advantage of these cost savings in a quicker time period.

Jarett, what we did is we took people existing in the organization, as Jerry said, and have converted them into cost-out.

Then in order to achieve the opportunity that is on the table, we're looking to add 20 more that would be incremental to the R&D line.

Okay, incremental to R&D.

Alright.

Final question right now.

Relative to entering 2002 and then entering 2003 and then now we're entering 2004, you have -- we finally have an economy that is getting better, we have much more momentum in terms of distribution capability, then obviously adding momentum on the product cost side.

Does that -- help me understand the opportunity to achieve new order flow with those kind of I think things that are directionally better relative to these other years.

I would say there is a fourth thing, too, is we have units in the field, which we did not have certainly in '02 and going into '03.

So we have operating units in the field and that in itself is probably the biggest market momentum.

The counter side of that is the funding opportunities are changing.

The New Jersey Clean Energy Fund, they haven't awarded a project in over a year now.

But you have positives with the renewable credits in New England and California.

So it is hard to define just how much the funding is.

But I think overall, we feel pretty confident that the order flow will pick up in '04.

I think the energy bill would be a big upside to us.

I think the government as a purchaser of equipment for mission-critical facilities is something that we have to work the appropriations cycle during the fiscal year.

So I would expect it, Jarett, but obviously I cannot predict when what is going to close when.

Chris Kwan.

Hi, guys.

It's actually Bill Gable (ph) for Chris Kwan.

I have a few questions.

Do you have any revenue guidance for '04?

We really have not been giving revenue guidance for '04 at this point.

I think what I have done in the past is I have given you a little bit of help on R&D contract revenue.

We're coming off a year, we had 17 million in R&D contract, we expect that.

It will be at least that, if not a little bit higher than that, so it could be in the 17-23 type range.

Product revenue is really a function of what orders we can bring into the path.

What about for cash usage in '04?

Cash usage, I'm really not going to give you a lot of guidance on cash usage.

We got our cash and into a 12-13 range in the last two quarters from an operating standpoint.

In the first quarter, I'm going to be adding Global into the equation.

Our objective with Global -- so what we have happening in '04 is we will have an increase in our R&D cost.

We're looking at some higher SG&A cost related to medical insurance and other insurances and then a little bit on the sales side.

And our objective is to integrate global.

It will take us a couple quarters to affect that.

We're in the process of looking at monetizing the TEG (ph) business.

We're also in the process of incorporating Global's solid oxide development into our SECA contract, so that will take us a little bit of time.

We have not finished the final contract with the Department of Energy at this point.

And at that point, our goal is to bring back cash flow as little as possible.

Okay, perfect.

Any current backlog?

Current backlog in total is about 6.25 megawatts, which is sp[lit. 3 megawatts would go to the R&D contract line, and we have 3.25 for commercial at this point.

Last question.

Can you give me a little more information on the Cat relationship going forward?

Cat relationship going forward is very good.

There has been a learning curve that we've gone up.

I think this megawatt hybrid -- that's where you put our megawatt fuel cell with 2 megawatts of gas generators.

That has a big opportunity.

I wish it had (ph) come out with it quicker, but it takes some engineering and development to come out with that product.

They announced it last week at the PowerGen show.

They're also focusing on developing a Cat branded product which they see engineering efforts to do.

They are also -- we are focusing on one of the Cat units that does packaging for them to do packaging plants for us, so there's a multiple level of relationships with Cat that is very positive.

The unit at their tech center during the last quarter we put in got a tremendous amount of interest from executive management all the way down.

They continue to use that when dealers or potential customers come through.

So it is getting stronger.

Okay, thank you very much guys.

Eric Prouty.

Great, thanks a lot guys.

Joe, on the global thermal acquisition, could you just give -- I know you are still in a state of looking at the company.

But any guidance on where you see headcount at Global Thermal going to or the consolidation of facilities?

And then any guidance on the Global thermal side of the revenue line, and how much revenue you see contributing to your own top line coming out of Global thermal?

Before he answers that, Eric, let me just give you the overall business scenario.

We wanted to strengthen our solid oxide technology so that we can be a winner in this SECA race.

As you know, it's three phases and there are 6 teams competing and after Phase I in three years, they will drop it down to three or four teams, and after Phase II, they will drop it down to one or two teams.

So we want to be the winner in that race.

We have also told internally, as well as externally, that the solid oxide development within Global will be consistent with the available funding under the SECA contract.

So that's what we will manage it to.

Great.

In terms of managing that, we have some open questions.

But the Global -- let me just talk about the Global thermoelectric business for a minute.

That business right now is a very strong business.

Their 2002 and then 2000 performance has been a very, very strong growth.

If you go back to their financial statements, that business on a U.S. business will throw off 3-3.5 million EBITDA cash flow.

So that is a pretty good business.

All indications right now are that that business continues to perform extremely well.

As you probably know, it is tied to natural gas development.

There is significant development around the world, especially in China and in India, Global Thermoelectric has some terrific expertise in international contracting and that business is doing very well.

In that regard as we said before, it is a non-core business to us.

We are exploring an opportunity to monetize that business at this point.

As Jerry said, we're still wrapping up the SECA contract at this point.

We are looking at the resources that are in solid oxide.

One point I'd like to make is that the Global Thermoelectric management team prior to the sale did an excellent job of reducing their own cash burn.

They actually went through their own reduction in force and we're doing an excellent job managing that cash flow.

Our job over the next two quarters is to continue to match that up to the SECA contract.

We have stated that we will manage that to available funds, but it will take us a couple quarters to get that integrated.

We would look to consolidate some of the space, which is another opportunity to reduce costs.

We are taking a hard look at that entire operation at this point.

Thank you for the clarification.

And just a follow-up question.

Any indication out there from a backlog standpoint if you look at some of the indications being given to you by your distribution partners, I mean is there any visibility into orders and backlog increasing over the next quarter or two, or is it still too early to say?

We're not going to forecast that ahead.

I will tell you that my confidence level comes from how broad the potential list is.

We see that from Marubeni, from Caterpillar, from PP&L and so forth.

We know what projects they're working on.

The difficulty has always been forecasting the timing because you are tied into funding, which delays the process and that is true in all of the areas.

I know the electricity prices declining in Germany is impacting MTU to some extent.

I look at the opportunity list, that's what I gauge it by.

If it keeps growing, that says that they're going to convert to -- some share of that will convert to orders, and I think we will see that in '04.

One last one.

Joe, any other orders that have already been paid for by your kind of the key partners, the Marubenis, etc., that you booked as revenue, yet have not been delivered yet, or would any new orders coming out of these guys be new orders for fuel cell on the (indiscernible) revenue?

For the most part I think that for example the Marubeni orders will be primarily 2004 revenue.

There is a small piece that would be, that would already be in our backlog.

But I would say that the majority of that will be in '04 revenue.

It will be new revenue opportunity?

Great, thanks a lot.

Mike Harris.

Good morning.

Just a couple of quick questions here.

The Cat order for the wastewater treatment facility in Los Angeles County, when was that order received?

I'm assuming that's a new order.

September, Joe, do you recall?

I think September, and we're expecting to ship it in the spring, which is much earlier than the committed.

The committed date -- September was the order or middle September, I think we're going to ship it sometime in the April-May time frame, which is much earlier than what was the commitment.

The commitment was to ship it a year.

I think as we both worked through our backlog and build up our capability, particularly with outside purchases from BOP suppliers and the like, we can keep squeezing down the book to bill cycle pretty dramatically.

Right now, we're looking at about six months and we get that down even earlier.

I just wanted to confirm -- that was the only new order received during the quarter?

Joe was shaking his head, I think so.

Yes.

You mentioned in the press release you expect to ship two more DFC 300-A power plants by the end of this calendar year.

What -- and applications are those for?

This is their natural gas and they're going to Seiko Epson up in Nagano (ph), Japan.

So they will be put on a boat in the next couple of weeks.

So those have not been shipped yet?

No, the two Epson absent units have not been shipped yet.

Actually, one more question Jerry.

Interesting comment regarding your DFC power plants can be used to cost effectively co-generate hydrogen, of which you commented could be made available locally for other applications, such as automotive fuel sales.

Can you talk about that further, the opportunity there?

I'm glad you picked that up, Mike.

Bernie Baker (ph) (indiscernible) my colleagues came up with the idea in 1989, as did Westinghouse, to say that your low-temperature fuel cells will never make it because you cannot get a high enough efficiency to -- the savings in fuel cell costs offset the capital cost of the hardware.

At that point in time, nobody was considering a hydrogen economy.

You had to get your hydrogen from the fuel.

So that technology was developed accordingly.

We use about 70 percent of the hydrogen in the fuel cell.

The balance of it goes into waste heat.

And the reason we do that is there is a market for waste heat, there is not a market for hydrogen.

If there is a market for hydrogen, we can tap off of that waste heat.

And so instead of a scenario that says of all of the fuel coming in, 50 percent goes to electricity, 35 percent goes to thermal load or co-generating, we could say 50 percent electricity, 20 percent to hydrogen and 15 percent to thermal load.

The reason we haven't is there has never been a market for it before.

And the problem you have with this whole hydrogen economy is -- you can make -- companies are making hydrogen right now -- Praxair, Air Products -- for the refinery industry, huge amounts of hydrogen.

But to get hydrogen -- but they're not going to put in the pipeline and infrastructure necessary until there is a big market for the hydrogen in automobiles.

The automobile guys are not going to use fuel cells for cars until they have hydrogen available.

So what we're looking at, we're looking at some opportunities to demonstrate this is that because we internally reformed, it's the same kind of steam reformation that you do in refineries.

Because we are doing that and we have distributed units, we can help enable the hydrogen economy by providing the source of hydrogen in a distributed basis until the infrastructure -- until there is enough market for the infrastructure to get built.

One of our DFC 300s we estimate could refuel one car an hour.

Not a lot, but it certainly -- there's not a lot of fuel cell cars out there either right now.

So that is the concept behind it.

We have seen interest obviously at DOE and other potential funding opportunities, even in Canada, because everyone is stumbling over this -- we need a lot of cars before we will put in infrastructure, we need the infrastructure before we have a lot of cars. (indiscernible) guys, we're not decades off.

We're ready today, we're shipping commercial products today.

We can help enable that early hydrogen infrastructure -- that is the concept.

That is very interesting and helpful.

Just to clarify regarding this opportunity, is this more than just a concept today?

Do you have a prototype design for this?

Yes.

And we have partners.

And I will tell you, Mike, one of the things we're trying get through -- everywhere we go, you talk fuel cells, oh yes, they're a decade or two off.

And we're saying hold it, guys, that is not the case.

We're the only guy.

As you know, Westinghouse has continued to postpone any production level and they're the only other fuel cell supplier for stationary power.

So that's what we're doing.

We're beyond the concept stage on it and we're looking for the appropriate funding levels for appropriate siting (ph).

Okay, that is helpful.

Thanks, Jerry.

Sanjay Shrestha.

Good morning guys.

Just a couple of quick questions here.

First one -- with an ongoing focus here on the cost reduction and really focusing on the cash burn, can you update us -- what sort of the megawatt shipment do we actually need out of Fuelcell Energy for us to get us to one operating breakeven and to profitability?

Let me to the other way.

A couple of years ago, we talked about cash flow breakeven in the 150-200 megawatts per year.

We are way below that now.

And then if you forecast ahead most reduction targets, it drives it even lower.

I believe it is in the 50-100 megawatt range now, probably closer to 100.

But as we get cost out of the product, that keeps (indiscernible).

At the end of the day, you can do all of the value engineering and cost-out, but you still need some degree of volume.

But if we can lower that volume cash flow breakeven, that is a big, big step forward and it gets us to profitability much earlier.

Okay, that is fair.

In terms of some of the key end markets that you highlighted could be a potential opportunity, mainly Japan as well as the East and the West Coast, can you tell a little bit more about that, in terms of what is some of the feedback you're getting from some of the potential customers in that end market, what are some of the things we could potentially see over the course of the next 12-18 months?

Let me give you a little bit of background.

Some of the early people that (indiscernible) early adopters, we did not have to be competitive to the electricity grid.

There are still some of those around.

But in today's market and the broader market, we need that funding to bridge between high cost low volume and low cost high volume.

And therefore, you go to the Northeast where you have high electricity prices, you go to California and Arizona and Nevada, you go to Japan and parts of Europe.

So -- and that funding absolutely makes the difference so that the customer is no longer an early adopter, but he is getting better pricing than he can get from the grid or equal to.

And our partners aren't in this for any -- they're in it to make money also.

So both sides can do that.

We know those pricing levels.

We know the cost of our products now.

So we particularly go for where the money is that provides this bridge to get us there.

Wastewater treatment, because it is a renewable, so you stop competing with the solar and wind guys because you're firm power (ph) and you're distributed.

Wastewater throughout the world is a very good opportunity because you are as renewable as solar and wind and you're firm power compared to those.

Beyond that, then it is the question of the baseload (technical difficulty) hotels, hospitals industry.

And then finally and it's one that we've particularly started working from last summer is the federal government as a purchaser of fuel cells for mission-critical facilities.

And that got tremendous added impetus after August 14th blackouts.

So those are kind of the three main areas that we are focusing on.

After that, it is targets of opportunities.

We may see a few early adopter type -- more early adopter type customers, and in particular, applications.

But we're pretty much beyond that now, focusing on this funding.

And as we get our cost out, the necessity for funding goes away.

So that is kind of how we see the timeline going forward.

I completely agree with that.

So, again, in terms of some of the key feedbacks that you've been getting from your customers, especially in the places where it is actually economical with the funding in place, what has been some of the feedback?

Like are they saying that we're evaluating it right now or are they saying maybe there is something that is down the road in 6-12 months.

Just trying to understand in terms of what might be the outlook for the new bookings going into your 2004?

It is like seeding the garden and you want to see how fast it grows.

We have ongoing discussions with Starwood (ph).

They have 740 properties or something.

If you look at the Marubeni release, those 3 megawatts of orders, that was a direct result or Kirin.

And we know where those units are going.

Now you have Fuqua (ph) (indiscernible) started up.

It is getting a lot of excitement.

JapEx (ph) is in the process of starting up, and the two units for Seiko will start up after the first of the year.

So you are starting to build momentum in there.

And I think the result is Marubeni released 3 more megawatts of units in the summer, but because they saw ell that momentum.

When will we see more from Los Angeles Department of Water and Power, etc.?

I will tell you, the King County wastewater treatment plant, that megawatt plant is very important to us.

There is a peer review group that EPA has set up which is consistent with consultants and people from the wastewater treatment industry that review that project and want to see how it operates.

I expect coming out of that, we will start to see some future wastewater treatment businesses.

The key to all of this is we see the momentum, we cannot time the closing of it as (multiple speakers).

That is fair.

One last question.

In terms of your hybrid power plant, the one you're working along with Caterpillar here.

Obviously the capital cost is half of what the DFC would be.

What could potentially be the capital cost of this hybrid power plant over the long-term?

Right now today, it makes us per kilowatt, capital cost per kilowatt, of a 3 megawatt package, less than half of what the cost of kilowatt (inaudible) DFC is, which puts it beyond market (inaudible).

Because we know where the market clearing (ph) prices are.

The second thing it does is, because our unit would run baseload and the two megawatts of engines would run (inaudible) peaking, we run most of the time, two-thirds of the time.

And therefore, the emissions are like 40 percent of what they would be if it was just engines.

The model if you read their white paper that they use to develop this product was a printing plant.

And we have looked at newspaper printing plants before and a 3 or 4 megawatt load is about where they come down (inaudible) printing plant.

And one-third baseload, two-thirds peaking (multiple speakers) also fits that model.

And we can adjust it.

We have a 1 megawatt plant with 3 megawatt of engines or a 1 megawatt plant with 1 megawatt of engines, depending on the relative ratio of baseload to peak load.

And the fact that we don't provide that peaking and load following like an engine does is also a nice fit.

And the other thing that just by human nature, Caterpillar dealers know Caterpillar equipment.

They are not as familiar with fuel cells.

But packaging it together I think puts a little more optimism with the dealer sales force.

Okay, that is great.

Thanks a lot guys.

Scott (indiscernible).

Hi.

Thank you.

I have a couple of questions if you can help me.

With the acquisition of Global, how much cash did you acquire in that and how much cash came along with it?

At November 3rd, it was approximately $55-$56 million U.S.

And that is inclusive in the balance that you offered of $155 million?

No.

Actually, you add that to the 155.

So actually, our total cash going into '04 would be 209.

209, okay great.

(multiple speakers) after our fiscal year ends.

Thank you.

Cash consumption is back on the rise, 20 new engineers for your cost-out requirements.

How long will then take -- how long do you think it takes before you get back to that $12-$13 million a quarter?

Is this one or two quarters or could this kind of slide out throughout the year?

First, let me correct you on something.

We are adding 20 engineers specifically for the cost-out process.

That is not to say what the total employment level of the Company will be.

Those are two separate discussions.

We will always manage the total number of employees based on the business demands.

The demand of cost reduction is part of the investment that we're making.

That doesn't say that we will stay at the same total employee level.

As far as the cash flow forecast, I think Joe, you would want to comment again?

We are managing -- it is a somewhat fluid situation.

And the other complications that come into play are managing the integration and potential monetization of the generator business at Global.

So what we're looking at is that over the next two quarters, we will absorb these items and then coming out of that quarter, we will start to get on track to get back into this range, this cash flow range.

Two of the issues that you have mentioned about things that are going to drive the business going forward were from bridge market opportunities to commercial opportunities.

Can you touch again on this renewable energy credits where you mentioned through mentioned (indiscernible) per kilowatt hour -- how many kilowatt hours would you actually have to generate per unit to bring that to being cost efficient or cost equal to the end-user, as opposed to using a grid? (multiple speakers).

Connecticut law says that you have to have so much renewable power within the state of Connecticut, and that can come from anywhere in New England, which is the Northeast excluding New York.

If we put a plant in Massachusetts, we will generate renewable energy credit that can be sold in Connecticut.

If you look at where our cost is to date, we are anywhere from 2-4 cents above the market clearing price, and that is what we have been getting funding and subsidies and incentives to bridge the gap.

This 3.5 cents obviously would go a long way towards bridging that gap.

I think it is 10 years if I remember -- the renewables go for ten years.

So Connecticut is not as a state.

I know that New York is talking renewable.

If we can get other states putting in these kind of renewable credits, then it makes a huge impact to us.

It will make an impact just in Connecticut, but it is brand-new.

It just happened in late summer or early fall.

And as I've said, they have just traded the credits.

We're talking to several developers in New England right now who are looking at multi-megawatt type projects to take advantage of these renewable credits, but of course project development takes some period of time.

Just one more question please because I did not hear the answer just on a follow-up.

Someone asked the question about megawatt cash flow breakeven requirements.

And originally, that range was offered at 150-250 megawatt units per year.

And the response was it is way below that now.

That is a fairly large range -- 150 to 250.

150 to 200 is what we've said (multiple speakers) years ago, and now we're saying it is in the 50-100 megawatt range.

That is a broad range, you're right.

It depends on what point in time you get to that volume level, okay.

If it is a year from now, we're -- but we've accomplished a lot more cost reduction than to date.

If it's two years from now, we accomplish again a lot more cost reduction.

So it is where those curves cross.

Got it.

In terms of megawatt unit shipped in your fiscal 2003 year that just ended, how many megawatt units did you ship?

We shipped about 6 megawatts of sub-megawatt plants and we shipped the 1 megawatt and 2 megawatt (indiscernible) plant.

The modules are shipping out during early '04.

So 6 full megawatts of complete plants and another 3 megawatts of partially complete.

Okay.

The backlog that you made reference to earlier, there were three Marubeni offers, orders to Seiko, orders -- that kind of gets you to about almost a year's worth of what you just completed.

Is that accurate?

Am I looking at it the right way?

I am trying to (indiscernible) -- are you are you halfway to --

We have 6.25 megawatts in backlog.

Three of that is related to our megawatt, to our 2 megawatt plant and then our Navy project.

Then there is 3.25 megawatts that are related to Marubeni and Grand Valley unit and (indiscernible) unit in Ohio.

So basically if in fact I break apart the revenue from last year, there is approximately $17 million of commercial (technical difficulty) and about $17 million worth of government R&D revenue.

Would you say that that mix going forward will be the same (technical difficulty) commercial?

Will the commercial business pick up faster than the government business has been declining?

Yes.

I mean what we have is the government business, we see it as a very stable business.

It comes in at roughly 20-25 million a year.

What you have in the last couple of years is you had a big year.

The prior year, we had over 30 million of government revenue, we had the large clean call project going out, we had a lot of the King County project going out.

We culminated that this year, we wrapped up some of those contracts, 17 million, but we look on an annual basis that that is a fairly stable, I said 17-23 before, I mean it could be as high as 25.

We're closing some of those contracts.

The opportunity to increase revenues is clearly in the commercial side, and we see that that is the trend, that the product revenues will increase faster than the R&D revenues.

The R&D revenue, if you're going to do 17 (indiscernible) 23 or 25 of commercial product revenue in fiscal 2004, what would the government pilot or R&D projects, will that $17 million number kind of decline again this year, or will that, or can I look for revenues to be above the 34 million that you reported this year?

I know it is a timing issue, I'm just trying to get the mix together.

We expect our government revenue will as a standard business.

The R&D contract line is a standard business and it should be a stable business at this point.

So it should be 17 or higher.

Great.

Thank you very much for the clarification.

Gary Schwab (ph).

Hi.

Just a follow-up on the Marubeni news that they are preparing for assembly of DFC power plants.

When do you think they will be ready for that?

And you said that the 3 megawatt order was a direct result of Kirin.

What kind of outlook is Marubeni giving you in megawatts, if they have giving you any for 2004 and 2005 that has created this more aggressive position?

They released the 3 megawatts of orders in late summer, if I remember.

Kirin has been operating since November-December, about 8 or 9 months.

We now have quite a few other units going into Japan, which will generate similar type of interest.

So that is where I drew -- they only had one operating unit in Japan when they released three more megawatts.

We know who those are going to, we also know who they have on their the potential list.

And that market as you know -- Japan is a tough market to penetrate.

But once you get inside, then you are inside, and we're inside and we're with Marubeni.

And we're the only ones that they can turn to.

The other fuel cell developers in Japan are not anywhere near to the stage that we are.

At our urging, we want Marubeni and they understand to get other Japanese partners who can make a lot of the equipment that is in the balance (ph) of plant.

It is crazy to ship electrical switch gear from the U.S. to Japan when you have Toshiba, Hitachi and all of these guys there.

So that takes some engineering and development work on their side also, and it is going to take some time.

But they're definitely moving in that direction.

They're also looking at other countries besides Japan and spreading out into Asia, looking at other areas.

So they are making very good progress.

But do you know when they will be ready to actually begin assembly?

Do they have any end point here (multiple speakers)

First, they are talking to potential balance of plant partners now.

How long it will take for those negotiations to conclude, and then from that point, how long before they complete the engineering to do the first one or two, that is hard to predict.

But it is months off, not years off, but it is definitely months off.

Okay, thanks.

I want to thank everyone for calling in and for your questions and we will talk to you next quarter.

Thanks a lot.

Thank you for participating in today's year-end 2003 earnings conference call.

You may now disconnect.