燃料電池能源 (FCEL) 2004 Q1 法說會逐字稿

Good morning.

My name is Jenny, and I will be your conference operator.

At this time, I would like to welcome everyone to the first-quarter 2004 earnings & company update.

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

After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS)

I will now turn the conference over to Mr. Steve Eschbach.

Good morning.

This is Steve 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 first-quarter 2004 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 FuelCell 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 Mr. Jerry Leitman.

Thanks, Steve.

I would like to welcome everyone to this call and to review the quarter and the outlook going forward.

First, I'm going to turn the call over to Joe Mahler, our CFO, for comments on the financial results.

Joe?

Thanks, Jerry, and good morning, everyone.

FuelCell Energy reported a net loss of 27.9 million or 59 cents per basic and diluted share, which includes a one-time charge of 12.2 million or 26 cents per basic and diluted share related to the purchase, in-process research and development from its acquisition of Global Thermoelectric.

The adjusted net loss per share without this acquisition-related charge would have been 33 cents per basic and diluted share.

This compares favorably with the 41-cent net loss per share for the first quarter of fiscal 2003 and the 39-cent net loss per share in the fourth quarter of fiscal 2003.

Since we acquired the outstanding common stock of Global for 8.2 million shares of common stock, per-share net loss (technical difficulty) are computed using approximately 8 million fewer shares.

Cash, cash equivalents, and investments on hand at January 31 totaled 193.1 million, which includes the cash and investments of 55.8 million obtained in the Global acquisition.

Consolidated cash and investments used during the three months ended January 31 were 16.1 million, including 4.2 million of cash used by Global during the first quarter, compared to a use of 20.1 million for the period a year ago.

Cash consumed attributable to FuelCell Energy was 11.9 million, within our quarterly cash consumption target of 10 to 14 million.

This quarter, in the press release we have provided a segment breakdown for you that separates our FuelCell product line from our thermoelectric generator product line.

FuelCell results include our DFC products and SOFC technology development.

Approximately 3 million of the FuelCell research and development expenses increase are related to Global's SOFC technology development in the first quarter.

First-quarter '04 DFC products sales were lower than fourth quarter '03 and the comparable quarter a year ago.

This is primarily related to product schedules that get shifted, including, in some cases by customer request.

Our backlog at 16 million is higher than the prior-year backlog of 14 million.

Cost of sales (ph) ratio for our DFC products remain above 3-to-1, as we are still operating on a one-off basis.

Much of the cost reductions we have identified and implemented have not yet been realized, and our inventory is a work in process.

And as such, our cost of sales ratios may not improve linearly, especially at lower volume levels.

First-quarter research and development contract sales were flat compared to the year-ago quarter, but were up 2 million from fourth-quarter '03.

This sequential increase is due to the DFC product development improvement program funding that was restored in fiscal 2004.

We expect to finalize the SECA contract during this quarter, and as such begin to see revenues and cost recognized in second quarter '04.

We began integrating Global early in the fiscal year.

We have eliminated positions and started the consolidation of facilities.

Much of the cost savings related to this has not been reflected in our financial results to date.

We will make our final determination regarding staffing and facility consolidation once we have finalized the SECA contract and once we have made a determination regarding the TEG product line.

During the course of fiscal 2004, our goal was to manage the integration of Global to a cash flow breakeven, managing the SOFC development program to the level of the TEG product line cash flow.

If we sell the TEG product line, cash proceeds will be sufficient to fund the development program for several more years.

We are prepared to make the necessary investment to support market penetration for our DFC products.

We are prepared to structure transactions that will stimulate sales beyond the traditional equipment sale.

This is the strategy implemented for our Santa Barbara transaction announced yesterday, and we will continue to look for opportunities to aggregate volume.

It is not our long-term strategy, but we believe this approach may accelerate the development of sustainable markets for our DFC products.

I will now turn this call back to Jerry.

Thanks, Joe.

Year to date in fiscal 2004, we have made significant progress towards our goals for the year, which are to develop sustainable market for our DFC products, continue our aggressive cost out program, and manage our cash consistent with market demands.

Let me first address the integration of our Global acquisition.

In addition to acquiring intellectual property with Global, we also added highly skilled personnel; physical assets, including pilot testing and production facilities; a profitable thermoelectric generator business; and approximately 56 million in cash.

As Joe mentioned, our integration efforts are well underway.

We have initially reduced staffing in the solid oxide fuel cell division by 40 redundant positions, and the consolidations of our facilities is in progress.

We have also been working with our SECA partners to integrate the Global team into the overall effort.

The solid oxide fuel cell division will be managed in accordance with funding for technology development, with both SECA and potentially other programs, both in the U.S., and more importantly, in Canada.

We also added a new distribution partner for our DFC products, Enbridge, Inc., focusing on the Canadian markets.

Enbridge is pursuing project for each of our DFC products for target applications such as wastewater treatment facilities, universities, office buildings, industrial facilities (technical difficulty) and the like.

In addition, Enbridge has been successful in introducing us to both provincial and federal government offices in Canada for potential R&D funding and incentives for deployment of our direct FuelCell power plants.

So we're very pleased with our Canadian activities so far, and expect this to continue in the future.

Our near-term business strategy is to develop sustainable market segments for our DFC power plants to generate sufficient volume to get to cash flow breakeven; then, longer-term, to exploit our worldwide leadership position for sustained competitive advantage.

With the difficulties our competitors are seeming to have in developing cost-effective products, we believe this market -- stationary FuelCell power plants for (technical difficulty) industrial customers -- is ours to win.

Our target market, distributed generation, is very large -- some 10,000 to 20,000 megawatts per year -- and dominated by traditional generating equipment, reciprocating engines, and turbines.

We only need a very small slice of this market to get to breakeven.

Our strategy is to establish strong positions in key target market segments by demonstrating the performance of our DFC power plants at customer sites so our customers get hands-on experience, and we build our position in the segment.

Keep in mind, our DFC power plants are not legacy products -- that is, not a new or improved engine or turbine with the benefit of decades of proven performance at customer sites -- but a disruptive technology that must be bought into by the customers.

Let me give you just one example.

At several ribbon cuttings and dedications I went to last year, the first question was always, "is it on?

Is it running?

I don't hear any noise."

If you have been around engines and turbines, you can understand how the lack of noise in a power plant is disconcerting.

It is critical for us to continue to deliver products to our customers to prove the viability of the products.

And we are doing just that.

In parallel with getting customer buy-in to our products, we are also focusing on being cost competitive with the grid and other distributed generation solutions.

While our cost out program is getting significant focus and support internally, we are also focusing on government incentives to bridge the gap today between today's cost and the higher-volume and value-engineered cost competitiveness of tomorrow.

Year to date, we have made significant progress in executing our strategy and achieving our 2004 goals.

Three new DFC power plants were commissioned, and four more were installed during the quarter, including our 1-megawatt power plant for King County in Washington.

When these units are commissioned during this fiscal quarter, we will have 26 units in operations at customer sites around the world.

To date, we and our partners have generated in excess of 27 million kilowatt-hours from our products at customer sites.

We have also secured orders for three new DFC 300A power plants, first a unit for a direct sale to the Salt River project in Arizona.

Salt River is a state utility that will be sited at the Arizona State University East Campus in Mesa and provide power to the local grid.

Next, as Joe mentioned, our first long-term power purchase agreement with the city of Santa Barbara for 500 kilowatts -- two DFC 300-A plants, for combined heat and power for its El Estero wastewater treatment plant.

This represents our sixth project at a wastewater treatment plant around the world.

Just a brief additional commentary on the Santa Barbara transaction -- this is a wastewater treatment application, an application that is developing into a sustainable market for our products and is in a key region, California, that we're targeting because of high electricity prices, strict air emission requirements, grid (ph) congestion bottlenecks, and incentive funding (technical difficulty) products, which includes our DFC products.

With the help of available incentives such as the California self-generation incentive program, we can be an economical alternative to grid-delivered power.

However, in this particular instance, the customer, the city of Santa Barbara, wanted to buy heat and power rather than owning the power plants.

Consequently, we decided that in order to make this transaction happen, the creation of a joint venture with our partner, Alliance Power, was the best approach.

Since we stand by our DFC products by taking on the financial and technology performance risk with warranties and guarantees, in this joint venture structure, we will be able to benefit on any upside potential, including selling our equity interest after demonstrating performance of the products.

While our preference is power equipment sales, near-term power purchase agreements may be an alternative approach to achieve market penetration in key target customer segments.

Once we have further established the performance of our DFC products, we believe we will be in a position to continue to develop sustainable markets with traditional power equipment sales.

We're pleased that the energy bill has resurfaced with favorable incentives for our DFC power plants.

However, whether it will pass remains to be seen.

It's only upside for us, since we have not been supported by a federal energy bill to date.

This, as well as other incentives available throughout the world -- Europe, Japan, California, and northeastern U.S. -- will go a long way to stimulate additional sales of our products.

However, as we have said before, this can be a protracted process that adds to the sales cycle time.

For example, the Santa Barbara project was subject to a public bidding process that took about six to nine months.

Another example -- the Connecticut Clean Energy Fund's 2004 proposal process for $8 million in funding began in December of last year, and project finalists are not expected to be announced until sometime this summer.

Another hurdle we face includes negotiating with local utilities regarding standby charges and exit fees.

While this will continue to be a hurdle going forward, it is one where we have a lot of support from both other distributed generation companies and customers of the grid who will have to pay these fees.

We continue to make good progress in our cost out program and have set cost reduction targets for each our DFC products for 2004, 2005 and 2006 based on the reductions already achieved last year.

We're focusing on all areas of our core DFC products, including mechanical and electrical balance of plant, FuelCell stacks and modules, as well as factory testing and startup, operations, and service.

This multi-year process is a multifaceted approach.

It started out with generating ideas, about 1,400 so far; ranking the ideas; developing initiatives; engineering the cost out ideas into the product; validation of the cost reduction; and then realizing the cost savings.

There is a lag in realization of these cost savings in our financial statements based on current inventory, the bill cycle, and delivery to the customers.

While the 2003 cost out initiatives are in the product lines today, the first 2004 block changes will be incorporated in April, and the next after that in October.

Part of this cost reduction effort is the field follow program we are conducting with all our units that are operating at customer sites.

Our DFC power plants are equipped with high-speed data collection systems that enable us to monitor on a real-time basis.

The key metrics that we are following closely include availability, reliability, output performance, and duration of planned maintenance.

There's a twofold effort behind this field follow program.

First, use customer operating experience to provide data for our aggressive cost out efforts, and next, to demonstrate to our customers and the marketplace the performance to show that our DFC power plants are ready today.

I might add that our cost out program is also being accomplished in cooperation with our OEM partners -- Caterpillar in North America, MTU in Europe, and Marubeni in Asia.

So the breadth and depth is significantly more than our sales alone.

We are very pleased with the progress we're making in 2004.

We're encouraged by the developments being made with our distribution partners in the markets and the customer targets we are pursuing.

We will continue to develop the market for our power plants, demonstrate the viability of our products, aggressively reduce products (technical difficulty) and manage our cash consistent with market demand.

With those comments, Operator, we are now prepared to open this conference call to any participants' questions.

(OPERATOR INSTRUCTIONS) Jarett Carson, RBC.

Real quickly -- and you spoke about it in the prepared remarks, just a little bit more on the cost out initiatives that we are looking to hit in 2003.

Is it just a function of the shipments and -- those cost outs haven't kind of rolled through the raw materials and production line and inventory yet, relative to what we're seeing?

Yes, Jarett, the 2003 changes have been incorporated but not so far in '04.

We'll do that in April.

Some are easy.

They're procurement changes, new vendors, et cetera, that have already been qualified in previous years.

Engineering changes, though, move in blocks that will be incorporated usually two or three times a year.

And it just takes time to work itself through the backlog and to actual customer delivery.

So there's a lag cycle.

And it really depends on the type of cost reduction that you have.

Can you give us -- you mentioned that you set some targets for cost out.

And I know it will be very difficult for us from the Street to be able to, perhaps, see that in the income statement.

But maybe follow through a little bit with your progress on that.

Can you give us some parameters, maybe, if I -- relatively speaking, what you're targeting?

Well, we said last year it was 25 to 35 percent, depending on the product.

And I'll just give you a ballpark of every year being in that order of magnitude.

And that's on total cost, raw material cost --?

We are attacking all the areas of it.

If we can do a natural gas odorant removal in three hours instead of eight hours, that's a cost savings.

Okay?

It's from after-sales service in the field to maintenance procedures to how fast we can do factory testing to get units out to the field, and then all the traditional raw material costs and component costs, also.

But it's the whole cost of the product.

Can we get the install done faster?

That cuts cost out, et cetera, et cetera.

So it's not just the capital cost of the hardware.

It's the total benefit of the product.

And most of our team have done this before with engines and turbines, both with GE, with Pratt & Whitney, with UTC, and companies like that.

So the process is pretty well documented and disciplined.

But there is a lag cycle between when you actually know you have the cost savings and when you can actually realize them in the financial statements.

And that's just a fact of life.

Another question.

Relative to the broad --

And by the way, Jarett, those cost reductions are not any technology breakthroughs.

In fact, the higher the technology risk, the lower the weighting of that particular cost savings idea.

So we feel pretty good.

It's blocking and tackling and engineering.

It's not a technology breakthrough that all of a sudden dramatically lowers cost.

We're working those on the R&D side, also.

But they are not in the direct planning purposes.

Final question.

Relative to the scope of potential or RFPs and order flow that you are working across the board -- with the PPA structure, is there an ability -- have you looked at that kind of order or RFP book and said, we could go back in here with this structure and accelerate something and maybe give us a little understanding of that, number one?

And number two, would the subsidy still play -- in one way it's a benefit, obviously, overall, but it does create this lag in cycle time on the sales cycle.

Can you give us a little understanding about how the PPA structure could either create, I guess, new order flow or accelerate existing RFPs, per se?

Yes.

We believe a PPA approach will accelerate -- now keep in mind, some of our partners are already doing this.

PP&L, I think, the Starwood hotels are all PPA agreements between PP&L, our partner, and Starwood as the customer.

And a broader geographical spread of PPA and Starwood is certainly being looked at very strongly.

So that would accelerate.

The key thing is that, because it's not a legacy product, it's difficult for project developers to get external financing for putting in FuelCell power plants.

And we looked at it and said, by the time we give all the guarantees necessary to make the plant financing entities comfortable, we might as well do it ourselves.

Now, as Joe and I both said, this is not necessarily long-term strategy change, but it could well be a way to pump up market penetration a lot more rapidly than purely equipment sales.

Marubeni, for example -- a lot of theirs are power purchase agreements instead of equipment sales.

Anyhow, if you think about the kind of customers we're going for -- they have been typically hooked up to the grid.

So they don't want to be in the power gen (ph) plant business.

They want to just get a better deal on the economics of both electricity and heat for cogeneration.

So it's not an unusual that has taken this energy solutions approach or power purchase agreement.

So yes, the bottom line is we think it will accelerate order development, but project development is a longer sales cycle than just selling equipment.

Chris Kwan, TD Securities.

Could you give a little more flavor on this is SECA -- what you're expecting?

And I think you mentioned April is when you expect the next round or the initial implementation.

What would you hope for during this early --?

Well, SECA has already given us a conditional award and released 3 million in funding.

The final contract -- we're probably 45 or 60 days away.

There's no issues there other than cranking out a multi-year contract, which our people are familiar with, as is the DOE contracts people.

And with the final contract signing, that would release another 2.8 million of funding this year.

And what we are doing -- Global was not in our original team that bid and won this award.

And now we've got to adjust the roles of the various team members to fit what makes the most sense with Global as part of our package rather than not.

And those two things together is what we're working on from an integration standpoint. (multiple speakers)

And the other -- as I mentioned, at both Enbridge and directly, we've talked to a lot of the parties in Canada.

Joe, you've talked to technology partners in Canada -- the government entities to look at getting additional funding by Canadian entities.

I was actually up in Calgary, we met with some Canadian funding sources.

We had some very, very good meetings with them.

They have a dialogue going with the Department of Energy.

They're trying to do some joint stuff.

I am not sure how all that will pan out.

But there's clearly an interest to help develop technologies, FuelCell technologies in Canada.

And we're optimistic at this point that we can make that happen.

So coming off -- we started the integration process at Global.

We just need to wrap up the end of the SECA contract.

And we should have a pretty clear path to what we need to do for the remainder of the year there.

Secondly, just further elaborating on this cost out, these targets for '04, '05, '06 -- my calculations show these Q1 FuelCell product costs still seem high on the product sales side, about 3.75-to-1 ratio.

Is there something unusual that's a little higher than normal in this quarter?

I would not say there is anything really abnormal in the quarter.

What we are subject to is we have low volume coming through the quarter.

We're still in a one-off situation.

We are still incorporating multiple vendor costs.

We put certain -- for example, the packaging and the inverter process we have out to multiple vendors.

So every time you do that, you kind of take a step back from the cost reduction.

So we continue to drive the overall costs down, but it doesn't get reflected in the quarter.

And then you have a fairly low-volume quarter, where it's just tough.

Our volume in manufacturing plants is running between 4 and 6 megawatts.

So you get some overhead factors that come into play in a low-volume quarter.

Chris, if I could, this is a continuation of a lot of the first-time costs.

For example, I think -- we didn't (ph), but I think Magnatek just announced they shipped their first article electrical inverter to us.

We're adding them and a German supplier, the same supplier who is supplying MTU to our first-article type units, whereas before we had GE, ABB, and SatCon, we now have two additional vendors who have what looks like some strong product differentiation.

What we do is when we put that first unit on a customer product, the cost of that goes against that product.

And that's why you see a lot of one-time first-article testing and so forth that reflects this higher ratio.

And, Chris, I will just add to kind of finalize the note (ph) is that all of our projections and modeling on cost out programs all look very, very positive.

When you throw a combination of the engineering, the value-added engineering programs in, the vendor cost reduction, and then you throw volume at it, it appears that we can reduce our market clearing volume.

And that looks really good to us.

We are actually very optimistic about -- and we are also waiting to start to realize this in our quarterly numbers.

On the power inverter side, you mentioned five companies you're doing work with.

Are you going to stick with a multi-supplier approach, or is the goal to have one or two of these suppliers?

Or how do you --

It depends what kind of deal it makes.

But we have found that more is better than less.

But probably, long-term, a couple, unless we can get some kind of strategic relationship established.

That technology itself is changing quite a bit, too.

And we don't want to be in that business.

And I am not sure that we want to lock into a supplier right now -- certainly not on a global basis.

But we can certainly change our minds if we get the right kind of offer.

A lot of it has to do with field performance.

It's one thing for a vendor to come in -- it looks great, the price is great, and et cetera, et cetera.

But let's run it out at customer sites and prove it to ourselves and our customers that we have -- we will have probably all five in (ph) vendors operating at customer sites by year end.

And that's kind of the proof of the putting.

And you know, operating real-world performance is what sets the criteria more than just first cost.

Two last questions -- the in-purchase R&D, 12.2 million -- does that include severance costs related to the Global acquisition, or are those still forthcoming?

Some of them have actually already been incurred, Chris.

But just to go back to your IP R&D number, no; that is a pure value for the technology that we acquired.

And lastly, the inventories -- you report a 17.6 million.

They didn't really increase a whole lot from year end.

And yet, you had a lot of TEG revenues.

How does that -- I am not following.

Where does that get reflected?

Were those TEG revenues incorporated in the inventories?

Or how are you accounting for that?

We're accounting for it as you would normally account for inventory.

I guess I don't quite understand your question.

The question is --?

Well, you had -- what was it, about 5.4 million in TEG revenues?

And your inventories did not really build up.

Are you just building these to order, and you don't carry them in inventory?

No.

Actually, the TEG business carries a pretty standard level of inventory somewhere between $3 and $4 million.

So if you look at the consolidated inventory number, there's actually 3 million of TEG inventory on the balance sheet at January 31.

Okay?

So actually, our FuelCell inventory actually came down a little bit in the quarter.

Eric Prouty, Adams, Harkness & Hill.

If you could give a little more detail on some of the product standardization that you are undergoing -- in a typical wastewater application, what percent of the overall product is standardized with the different contracts and the different shipments that you've had around the world, and how much of it has to be engineered for a specific site?

If you take our 250-kilowatt unit, Eric, it's standard as shipped from here.

It will have an option of whether it's 60-volt or 50-volt for Japan, for example.

But the components inside are standard.

Now, when it sits on the pad of the customer side, how far they have to run to get the gas piping and how far they have to run to get the water into the water treatment system, how good the water is versus our standard spec for how good it should be, how much on the gas -- if it's natural gas, if it's methane from the wastewater plant.

We found that most of the methane from municipal wastewater plants is fairly uniform country to country.

It's different from the U.S. and Japan.

But once we know that, then we try to standardize the gas cleanup skid.

In the U.S., we're definitely moving in that with a company who looks pretty attractive to us and does a lot of gas cleanup.

In Japan, that depends on whether it's the customer doing it or Marubeni doing it.

So that has some variability.

The product itself is -- and then what you're doing with the cogen and heat is also a unique customer option.

But the product itself on its skid is very standard.

And it's the national gas standard product, okay?

It's not a wastewater treatment gas product.

The methane wastewater, then, is cleaned up to go straight into the machine (multiple speakers) like gas.

And finally, Joe, for you -- and you might have talked about this and I might have missed it in the beginning.

But could you give kind of a yearly cash burn estimate -- some guidance (multiple speakers) the numbers?

Eric, the target that we're trying to run to in the FuelCell business is 10 to 14 a quarter.

Obviously, in this quarter, we ran about 16.

Our goal on Global is to bring that down to a breakeven with TEG business by the end of the year.

So you should see that 16 decline over the next couple of quarters back into this 10 to 14 range.

Neal McAtee, Morgan Keegan.

I just had a question about the waste power plant.

How will that work?

Will you be recognizing (ph) revenue when you sell the power, and is the cost of the unit amortized over the life of the contract to offset that revenue?

Or is there -- because I guess you're not really selling it upfront.

I'm just sort of curious how you handle that.

Neal, it's Joe Mahler.

Yes, you pretty much have the accounting.

We will put an asset on our books, which is the value of the power plant.

And then we will be taking revenue into our product sales line that is the kilowatt-hours sold during the course of the term of the power purchase agreement.

And that will be matched with operating costs plus depreciation.

And those costs will match the revenue over the life of the power purchase agreement.

And that capital asset will be net of the incentive funding that we receive from California, Neal.

And then I guess the other side is if you wanted to, you would have the power purchase agreement, PPA, as an asset that if you wanted to finance, I mean, you've got enough cash to cover the cost of making the unit.

But if you wanted to, you could also use that power purchase agreement, PPA, as backing for financing.

Would that be an option, I guess?

That is our expectation.

This is not yet -- it's not a legacy product, at this point.

So you know, and you know what the credit markets have been over the last three years.

They have -- it's been very difficult.

But our expectation would be that we would leverage these transactions and finance them in the future.

And just at the end of the day, with the length of the power purchase agreement and all that, do you think you come out -- when you look out at the end of the contract and it was profitable?

Yes, I think that if we ran these projects -- you have got to remember that our initial cost right now is pretty high.

But we've actually modeled some of these contracts where, yes, we can actually turn positive cash flow on these projects.

But as our cost comes down -- and that's one of our strategies is that this can be a way to get more volume.

What we're trying to do is aggregate contracts.

And if we could aggregate some larger-scale PPAs to get more volume through the system, then the capital cost of the units comes down pretty quickly.

And that creates a real opportunity to have a cash flow model.

And did you say how long the PPA was for?

This one, the Santa Barbara, is for ten years. (multiple speakers) With an option.

But even given the high cost of building this unit because, essentially, it's a one-off unit, at the end of ten years, do you look back and -- I mean, was it even profitable even at these costs?

I think, if you incorporate in all of the incentive funding, we can get to a breakeven on these projects.

Keep in mind, too, Neal, because it's wastewater, there's not the fuel risk that you would have if it was a natural gas power plant. (multiple speakers) And we see others here.

L.A.

Sanitation, which we announced a couple months ago through Caterpillar, is an equipment sale.

This one happens to be a power purchase agreement.

But since the sewage plant is generating their own fuel, there's not a fuel cost component or a fuel cost variability in there that we have to be concerned about from a risk standpoint.

That's nice, too.

Congratulations, guys.

Sanjay Shrestha, First Albany.

First one, the hybrid power systems along with Caterpillar -- can you tell us a little bit more about that in terms of hypothetical efficiency that you might be able to achieve out of it, as well as a potential timeline for the market introduction?

Let me just -- I don't know off-hand what the hypothetical efficiency is.

Our plant is 50 percent plus.

I think the Cat engines are in the high 30s now.

They are pretty darned efficient.

But the beauty of that one is the mix of a 1-megawatt baseload and, say, a 3-megawatt peakload.

So the engines run part of the time to get the peaking.

The baseload stays on all the time.

So you get the improved capital cost of two-thirds of your plant is engines, which are a lot cheaper.

But you get the baseload environmental footprint, which is much cleaner because the engines are not running that much.

So if you look at it from an environmental standpoint, it's a much better environmental footprint than engines by themselves, but a lot better financial footprint than fuel cells by themselves.

And we are looking at a couple of pretty good opportunities in the marketplace for that.

We'll see how successful we'll be.

But well, frankly, Cat's is doing a good job, both in developing their own Cat-branded product as well as in the marketplace.

I just mention it because I saw it yesterday -- we even got a picture of one of our units in their annual report.

That's great.

Okay, and in terms of the market introduction timeline, is there a timeline there, Jerry, that you could talk about?

For --?

For the hybrid power systems?

There has been a couple of them, I know, right now.

How real they are will remain to be seen.

And (multiple speakers) also, kind of looking forward here, talking about the cost out strategy and looking to '04, '05 and '06 -- and if you could tie that together with the market clearing prices and where are you today on a per-kilowatt basis and with an ongoing strategy here of taking the cost out, how do you sort of see a lot of new markets opening up besides just the wastewater treatment or some locations where the price of electricity is higher?

Can you just tie that cost out targets together with the market clearance?

We're not at market clearing right now without incentives.

Okay?

And we'd rather use incentives, even though that may be slower than using shareholder capital.

But that may change.

As we see the cost out coming into effect and we define the market clearing prices better, then we made launch with shareholders' capital because if we put a volume component on what the cost out guys are doing, then it makes a huge difference.

At some point, you've got to have volume to get full advantage of a cost out program.

And what we want to do is look forward and say, okay, we see that volume at this market clearing price.

Where are we today on the cost out, and how much further have we got to go?

That's what sets that timing.

I'm not comfortable with sharing that publicly right now.

But that is the approach that we're taking.

So we'll launch before we get to market clearing prices.

But we will have a clear path that says by the time the orders load up, we will be at that point.

Walter Nasdeo, Ardour Capital Investments.

I just have a couple of housekeeping questions here.

In referring back to your burn -- you're getting to the 10 to 14.

That is inclusive of Global at that point?

Yes.

What happens, Walter, is that you get 16 this quarter, and we are going to bring Global down over the next three quarters, okay?

And keep in mind, too, Walter, we haven't put any SECA funding into the solid oxide group up in Calgary yet, because we haven't released that funding to them.

We'll have to see how we integrate into the team.

So all of the cost of the SOFC development during the quarter has gone without revenues to support it.

Now, are we expecting to see any more costs associated with this acquisition?

Yes.

You will see some more cost coming through.

We're currently in the consolidation phase.

We are looking at consolidating certain facilities.

We're also looking at obtaining additional funding for that unit, either from U.S. sources or from Canadian sources.

So that process will continue over the next few quarters.

And what is your current installed capacity right now?

How many megawatts do you have in the field?

(multiple speakers) 26 units in the field.

And they're all 250s; right?

There's actually one -- there's actually 25 250s and one 1-megawatt plant.

The King County wastewater plant that's starting up later this month, then the clean-coal 2-megawatt plant, where the modules will ship in the late spring.

David Kurzman, Needham & Co.

Question, please, on the Santa Barbara plant details.

I picked up that you said it's going to be breakeven, probably, over the long-term with subsidies.

Can you attach some kilowatt-hour price numbers with that, and then tell me what the ownership of the joint venture is, and just basically flush out more details on that joint venture?

I won't be able to give you the kilowatt-hour price.

That was a competitive situation, and it continues to be competitive throughout California.

So I don't want to expose that price to you, David.

As far as the structure of the LLC -- while it is a joint venture, we have business control of the LLC, because we've got the most skin (ph) in the game.

And in terms of the balance sheet impact that you see from the Santa Barbara, you did say you're going to put those assets on your balance sheet.

Can you give us any sense as to how big the quantity will be and the timing?

Well, as the project is -- well, let me just back up.

In terms of the ownership of the LLC, we will be consolidating the financial results.

All of that will come back to -- if that's your question, all of that will come back to FuelCell's results.

And we'll put an asset up on the books.

As we incur the cost to put that unit together, we will put an asset on the book.

It will be at a fair market value not dissimilar from what we sell units for on equipment sales.

Then, as I said before, the accounting would become strictly -- you take the PPA revenue in as you sell kilowatt hours, and then you would attach to that cost including depreciation and operating costs.

You guys gave a cash burn number, but in terms of your backlog as I tried to pick up a revenue number for this year, how much of the 16 million in backlog do you expect to hit in the next nine-month fiscal year?

I have not really been answering.

We're in the process of delivering units.

A lot of that is subject to the customer delivery requirements.

Quite a few -- of the 16 million in backlog, a large portion of that is the Marubeni.

Those units will start to get delivered -- shipped in the summertime and then be installed late summer into the fall.

That's most of where -- of that backlog.

In terms of the plans for the generator business, I know you've said you are looking at it still.

Can you give a sense as to what are going to be the key factors that will turn (ph) whether or not you keep it, not keep it, or do something else with it?

The key factor, obviously, if it has more value to someone else than it does to us.

We think it's a neat business, but our focus has to be on fuel cells, and our predominate focus on the direct fuel cell we are commercializing, the longer-term focus on solid oxide products and the SECA contract, which is a 10-year time horizon.

So we can't put time, effort, or resources towards growing that business and making it better.

And if we find someone to whom it's more attractive than us, then obviously we will monetize that asset.

But it's a great business, and Joe and I both, I think, have fallen in love with it, and like the management team, and like what they are doing.

But it can be, I think, developed better under another parent then ourselves.

And final question --

And by the way, we should know that in the next 60 to 90 days.

This is not a long-term scenario.

60 to 90 days, Global -- on the -- what was my question?

Oh, yes.

The 25- to 35-percent cost reduction per-year target across all areas -- can you give me a sense as to at what point -- is it 2006?

At what point do you think you can be manufacturing at either a slight loss or breakeven in low volumes -- or if you want to address it a different way, what does this do to your revenue breakeven number -- if you could quantify megawatt manufacturing to breakeven?

I want to try to get a sense here as to how close this brings us to profitability on the DFC business.

If we look at the cost targets and where we are today, then and certainly by '06 we're below what we see as market clearing prices today -- and certainly in Asia and in North America.

The question is how soon can we get to that?

Is it '05 or the end of '04?

And that depends on the progress that we actually make and how we roll those into the financials.

We have said that our breakeven point -- I think we said in the K, Joe, didn't we? -- that is less than 100 megawatts or approximately 100 megawatts.

We think that number is decreasing.

At one point about three years ago, we thought it was substantially higher than that.

So it's a progress thing.

Certainly, the targets we've got for the next three years gets us way beyond market clearing prices.

That's what's important.

At this time, there are no further questions.

Okay.

Operator, thank you and thank everyone for attending the call.

We will talk to you next quarter.

Bye-bye.

Thank you for attending today's conference.

You may now disconnect.