燃料電池能源 (FCEL) 2005 Q2 法說會逐字稿

At this time I would like to welcome everyone to the FuelCell Energy second-quarter earnings and 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) Thank you.

Mr. Eschbach, you may begin your conference.

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 second-quarter 2005 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 now like to this call over to Mr. Jerry Leitman.

Thanks, Steve.

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

But first let me turn the call over to Joe Mahler for more detail on our second-quarter 2005 financials.

Joe?

Thanks, Jerry, and good morning, everyone.

FuelCell Energy reported a net loss to common shareholders for the second quarter of fiscal 2005 of 16.8 million or $0.35 per basic and diluted share, compared to 19.1 million or $0.40 per basic and diluted share same period of the previous year.

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

Treasuries at April 30, 2005, totaled approximately 212 million.

Cash used in the quarter was approximately 19.5 million.

Capital expenditures totaled 3.3 million, which included approximately 2.9 million of capital for power purchase agreements.

Cash dividends of approximately 1.5 million were paid on convertible preferred stock in the quarter.

Our cash use during the quarter for operations, including PPAs and dividends, approximated $15 million, within our 15 to $20 million quarterly cash consumption range that we have discussed in previous conference calls.

FuelCell Energy's consolidated revenues for the second quarter of fiscal 2005 were 6.1 million, compared to 7 million for the second quarter of fiscal 2004.

Components of revenue and cost were as follows.

Fuel cell product sales and revenues were 3.3 million for the second quarter, compared to 1.9 million in the same period a year ago.

Sales were primarily to Marubeni and PPL Energy Solutions; and approximately 200,000 was related to the Santa Barbara power purchase agreement.

Product backlog totaled approximately 20.4 million, compared to 28.6 million on the same date a year ago.

Included in these figures are 1.6 million and 1.7 million respectively related to long-term service agreements.

Product sales backlog does not include power purchase agreements.

Cost of product sales and revenues were 10.6 million and 9.6 million in the quarters ended April 30, 2005, and '04 respectively.

The ratio of costs to product sales and revenue improved to 3.2 to 1 during the second quarter from 5.0 to 1 for the same quarter of a year ago, on lower product costs as the Company recognized savings related to its cost out program.

When compared to the quarter ended January 31, 2005, the ratio of costs to product sales was impacted by costs related to the Sierra Nevada Brewing Company and Sheraton San Diego power purchase agreements.

Adjusting for these would bring the ratio in line with the first quarter.

R&D revenue for the quarter was primarily related to solid oxide fuel cell development under the U.S.

Department of Energy's Solid State Energy Conversion Alliance program, combined cycle Direct FuelCell Turbine development under the DOE's Division 21 program, and ship service fuel cell development with the United States Navy.

Revenues were lower with the completion of the product design improvement in Bath Iron Works' contract and less revenues on the Clean Coal and U.S.

Navy contracts.

AS of April 30, 2005, the Company's research and development sales backlog totaled approximately 22.3 million, of which Congress has authorized funding of 9 million, compared to 23.6 million, 7.1 million authorized, as of April 30, 2004.

Research and development contract costs were 2.6 million for the second quarter of 2005, compared to 7.0 million in the same period last year.

Ratio of costs to research and development contract revenue was 1 to 1 in the second quarter compared to 1.4 to 1 in the same quarter last year.

The improvement in the quarter-over-quarter ratio was attributable to the completion of the King County and Clean Coal megawatt projects, which had significant cost share obligations.

Administrative and selling expenses and research and development expenses for the three months ended April 30 were lower than the same period of the prior year, primarily related to consolidating Canadian operations.

For the six months ended April 30, FuelCell Energy reported a total net loss to common shareholders of 36.2 million or $0.75 per basic and diluted share, including net loss from discontinued ops of 1.3 million.

This compared to a net loss of 47.2 million or $0.99 per basic and diluted share, including net income of discontinued ops of 0.9 million, during the six months ended April 30, 2004.

Results are improved due primarily to the consolidation of Canadian operations, lower product costs, and improved cost ratios in the R&D business.

We continue to target our core product quarterly cash consumption at the previously stated 15 million range.

PPAs that we finance ourselves will add to this quarterly consumption, again in accordance with previous guidance.

A positive development for us is that the multi-megawatt RPS projects are generating significant interest from third-party financial (inaudible).

We enter the second half of fiscal 2005 with a very healthy balance sheet, about 212 million in cash.

That gives us solid financial footing to effectively bid multi-megawatt RPS project proposals that are emerging in New York and Connecticut.

I will now turn this call back to Jerry.

Thanks, Joe.

Now let me review our progress this quarter in executing against our business strategy, particularly in the areas of our ongoing cost out program, meeting customer expectations, and market opportunities.

Our customers are reporting that our DFC power plants are giving them more control of the cost, emissions, and reliability of their electric power generation than ever before.

On the strength of our continuing to improve the performance and availability of the plants, customers are telling us that fuel cells are a practical and valued part of their distributed generation.

As a result, we are seeing an increased interest in the marketplace for megawatt and multi-megawatt fuel cell plants to meet the growing demand for ultra-clean, efficient, and cost-competitive energy solutions.

During the quarter we continued to meet our target of reducing costs 20 to 25% on an annual basis.

Our cost out program began just two years ago.

Initially we focused on our sub-megawatt products, which at the time cost about $10,000 per kilowatt.

Last week we formally introduced our modular DFC300MA design, which costs 25% less than its predecessor.

We expect to be shipping these DFC300AA power plants to customers later this year.

Right now we are on track to reduce product costs even further to about $4,800 per kilowatt by the end of this calendar year.

We are also extending the cost out initiatives from the sub-megawatt line to our megawatt class product, which already has an inherent 20% cost advantage, primarily due to the economies of scale related to the balance of plant.

All lessons learned in the field with our sub-megawatt plants are working their way into the megawatt class design and process improvements.

We fully expect to realize further cost reductions from the intrinsic advantages associated with increasing the scale of our power plants.

Finally we have already put in place a global sourcing strategy and are ready to capitalize on cost reduction when our volume ramps up.

Bottom line, we believe we can maintain this case of continued 20 to 25% annual cost reduction for the foreseeable future.

I mentioned the positive feedback we're hearing from the field.

I believe there are several reasons why this is the case, not the least of which is the benefit of our growing experience from having 40 Direct FuelCell power plant installations worldwide.

This year we completed a second in-depth customer survey to see how well the Company and our products are doing against customer expectations.

We asked for ratings on a wide range of areas, including our aftermarket customer service, product performance, and project management.

The survey was comparable to one that conducted a year earlier with the operating fleet in the U.S. and Japan.

This year, with the larger installed product base than the year before and a response rate that was 97%, overall customer satisfaction on a 7-point scale rose to 5.0 from 4.5 the year before.

I am pleased to report that customers indicated that power plant trips generally were due to grid disturbance or other factors that were not related to our fuel cell technology.

The survey showed customers continued to rate us highly for our aftermarket service.

I think another reason customers are giving us higher grades is that our power plant availability continues to improve and meet their expectations.

From 2003 through the end of the previous quarter, availability of our power plants in the field rose to 89%.

That is up from 87% reported through last January.

I should underscore that these percentages are very much in line with standard industry benchmark for new power generating projects at this stage of commercialization.

This demonstrates progress toward achieving availability in excess of 95%, a benchmark for world-class power generation equipment.

From January 2003 through last month, our DFC power plants at customer sites around the world generated more than 70 million kWh of electricity.

That doubled from the number of kilowatt-hours generated a year ago.

Increasing fleet operating hours is key to improving performance of the fleet.

Now let me touch on the key customer signings and sales activities from the quarter just ended.

During the quarter we started power plant operations at Sierra Nevada Brewing Company, a 1-megawatt plant, and at the Sheraton New York Hotel and Towers, Pohang University in Korea, and the Salt River Project in Arizona at 250 kilowatts each.

We also received new orders for DFC power plants totaling 1.25 megawatts during the quarter.

The Sheraton San Diego Hotel and Marina is a 1-megawatt power purchase agreement through our joint venture with Alliance Power.

This PPA is a direct outgrowth of the strong commitment its parent company, Starwood Hotels and Resorts, has made to install our plants as a way of economically meeting its electricity needs with ultra-clean power generation.

Separately during the quarter we sold a 250-kilowatt unit to our partner, PPL EnergyPlus, for Pepperidge Farm.

Our plant will produce 20% of baseload power for Pepperidge Farm's newest and most advanced bakery in the U.S.

We're pleased with this sale, first, because it is another instance of a repeat sale into the food processing segment, but moreover where the power plant is situated in Connecticut it will help the state achieve its cleaner emission targets.

So this serves as a model for distributed generation in other states that have emission standards on their books.

Our 1-megawatt power plant in the King County wastewater treatment facility in Washington State is becoming a showcase for ultra-clean technology.

Ongoing availability of the plant exceeds our current fleet average and has generated tremendous international interest, resulting in technical tours from visitors representing nine countries since it began operating a year ago.

Also during the quarter the plant earned an environmental achievement award from the National Association of Clean Water Agencies.

Since we commenced operations at King County last year, our first megawatt plant, we have been witnessing a market trend towards larger installations.

This has been confirmed in our recent customer orders including the Santa Barbara wastewater treatment facility that generates 500 kilowatts, then Sierra Nevada Brewing, the Sheraton San Diego Hotel and Marina, and the Santa Rita correctional facility, all of which are megawatt plants.

One of the important initiatives going on today at the state level is that a growing of number of states are seeking cleaner energy sources by defining Renewable Portfolio Standards, or RPS.

An RPS is basically a mandate for electric utilities to provide a certain amount of their electricity from renewable sources such as wind and solar.

Currently 18 states have RPS laws on their books.

In six states, California, Connecticut, Hawaii, Maine, New York, and Pennsylvania, our ultra-clean fuel cells operating on natural gas qualify as renewable, which opens these markets to our products.

The fact that fuel cells are firm 24/7, predictable power differentiates us from wind and solar, because these are intermittent in nature.

This drive for ultra-clean firm power has resulted in requests for proposals in three states.

In New York a request by the Long Island Power Authority calls for 10 megawatts of fuel cell power plants to be installed next year.

In Connecticut, Project 100 mandates that its utilities contract for 100 megawatts of power generation from renewable sources by mid 2007.

Connecticut expects that 30 to 40 megawatts will come from fuel cells.

In addition, FuelCell Energy is a member of the California Stationary Fuel Cell Collaborative, which has submitted a bid to provide 200 megawatts of ultra-clean fuel cell power plants from mid 2006 through mid 2008, in response to Southern Cal Edison's request for offers for up to 1,500 megawatts of new large-scale power generation by August 2008.

The RPS market for FuelCell Energy's DFC power plants is significant and momentum is accelerating.

Let me quote a recent premin (ph) EPRI solutions report which says the RPS potential in the six states that qualify fuel cell power plants today on natural gas as renewable is over 10,000 megawatts through the year 2010.

Clearly we are seeing our markets move towards megawatt and multi-megawatt installations.

I might add, this is not only in the U.S., but interest in megawatt plants is also occurring in Japan and in Europe.

Outside the U.S. the Kyoto Protocols and CO2 emissions requirements are driving the markets for higher (ph) efficiency and cleaner power generating products, increasing interest in our DFC products.

In summary I am pleased with the progress we're making on our business strategy.

Our DFC products at customer sites are meeting expectations for performance and availability.

Our cost out program remains on track for annual product cost reductions at 20 to 25% per year.

And we see a clear path to reduce our product pricing to be competitive without incentive programs.

Drivers of RPS, Kyoto Protocol, and CO2 emissions increase market opportunities for our DFC products in the megawatt scale.

With over 210 million in cash, we have the solid financial footing to continue to execute our business strategy for the foreseeable future.

With that, operator, let's open up the call for any questions they may have.

(OPERATOR INSTRUCTIONS) John Quealy, Adams Harkness.

In terms of the cost reductions, Jerry or Joe, can you comment on where they are coming out of?

Is it balance of plant?

Is it engineering solutions?

And how that mix will be affected as we start up with the '06 year cost reductions here in a couple months.

John, it's coming from all areas, balance of plant, fuel cell stack and modules, manufacturing cost savings, service cost savings, speed of conditioning from our suppliers, from our packagers, from sourcing of components.

So it is not a one-off type or effort.

It starts with brainstorming of hundreds of ideas.

That is then narrowed down and weighted depending on the technical risk of getting there and how big the cost out saving is.

Then we assign teams of people to achieve the cost savings, validate it through testing as required; and then we incorporate it in the productline.

And when we do that, we do it in blocks.

You don't take every change and incorporate it in your productline.

It will drive you crazy.

That's why the DFC300AA which we just announced last week is what we internally call our block 2 design.

We're working on block 3, which will get us additional cost savings for calendar '05.

As I said, we see this 20, 25% -- we do a rolling three-year plan; but we don't see anything to stop that going forward.

Admittedly as the costs get lower, the number of dollars gets lower.

But the emil (ph) percentage stays the same.

So it runs the full gamut of any cost out program, every area of product cost.

Joe, you (indiscernible) anything to add to that?

No.

That's fine, Jerry.

Great, then in terms of the reliability, you had some good metrics this quarter.

Can you talk a little bit about your plans there in the next coming quarters to increase that metric?

You have it looks like 40 plants installed worldwide now.

Can you dig a little deeper and tell us what was the driver behind increasing the reliability this particular quarter?

Well, what happens is the name of the game is getting operating hours.

So the more operating hours we get, the more issues you find.

You take each of those issues and solve them, then you incorporate those solutions throughout the fleet.

When you do that, the overall availability of the fleet get higher.

Keep in mind as you increase like we did last quarter from 87 to 89, you're going all the way back to the first unit at Kirin Brewery in January of 2003.

So to move the entire fleet up, obviously the later units are performing with a lot higher availability than the earlier units.

I will give you one example.

We used to have a situation that when a unit would come off line it would take eight hours to put it back on line.

That is a big impact from an availability standpoint.

We now have software developed that we can do that in 10 minutes.

We're rolling that software change out to the fleet as we speak.

So you can imagine the impact of just that one change to go from eight hours when you are off line due to a grid disturbance or something, that you're now back on line in 10 minutes rather than eight hours.

So those are the kind of incremental changes that will impact the fleet performance.

My final two questions.

First maybe for Joe, in terms of PPA.

Looks like you spent about 3 million in the quarter.

Can you give us an idea of how much you are budgeting for PPA for the remainder of '05?

Yes, the PPA activity in this quarter was primarily the Sierra Nevada Brewery, so the PPA activity that will come through in the third and fourth quarters will be related to the San Diego hotel project, which is also a megawatt.

So yes; you're talking effectively those were units at about $8,000 a kilowatt.

So you're talking about $8 million in that regard.

For the rest of the year?

Okay, great.

My last question, Jerry, can you comment on how you think the competition is going to stack up for both the LIPA contracts and Connecticut 100?

And how you folks see those opportunities?

I can't answer, because LIPA obviously keeps it very quiet and low profile.

So I don't really have any concrete information on whether or not anyone else did bid that project.

We are confident it is not Siemens Westinghouse.

They have further delayed their commercialization;

I think the 2010 was the last press release I saw from them.

We have seen press releases from United Technologies that they are getting back into the business, but they had pulled out a couple years ago.

Whether that happens or not remains to be seen.

Very frankly I think the performance of our equipment allows us to be competitive against anybody that I could conceive getting into the business.

It's not necessarily all bad to have a new competitor or former competitor come back into the business.

Two companies flogging a market usually tend to build a market faster than one, but we'll just have to see.

At some point in time it will become apparent, John, but right now it is not.

Thanks.

Sanjay Shrestha, First Albany.

A couple of quick questions here.

First one, I am looking at the comment you made here in your press release about being at that $4,800 per kilowatt by the end of this year on the sub-megawatt scale; and the megawatt plant is already 25% lower than that, so that puts us at 3,600.

There doesn't seem like there's a lot of -- it's more of a blocking and tackling and taking the costs out another 25%.

So is it fair to say that by the late 2006 or the end of calendar 2006 you'll be in a position where, even without the volume, the cost would be at a point where seller to (ph) market would be economical without any incentives in place?

There is a spread between the 1 and 2 megawatt plants.

Obviously the 2-megawatt plant is more competitive than the 1-megawatt plant.

But, yes, we could see megawatt plants being at the upper end of the market clearing prices in another 18 months for sure.

Now market clearing prices change depending on the price of the fuel and what happens to the grid.

From what I have seen the grid pricing is going up in virtually every state in the country, so those market clearing places can change.

The sub-megawatt, because of a lack of BOP economy of scale is going to take longer.

So two things are happening.

One is we want to focus on megawatt because we get over the goal line quicker with the megawatt plants, and what we're seeing is kind of a not unusual -- is that the markets are beginning to recognize that these things are for real.

It's nice to buy 250 for show and tell, but real men talk megawatts, and you are starting to see really megawatt opportunities coming in.

We don't comment on our proposal list, but I can tell you we have got interest in megawatt plants in Europe, particularly the UK, in Japan, in Korea, and in North America.

So those two seem to go pretty much hand-in-hand; and the performance of the megawatt plants is what is really kind of tying the ribbon on the opportunity.

Great.

A follow-up on that real quick, in terms of today if you wanted to sort of just chase the order, you probably could given the reliability.

But is it more of a function for you guys where you're establishing the market; you have got to do a couple of these power purchase agreements; you have got to kind of go after some of the hotels and 24/7 kind of opportunity.

But you kind of want to be at the crossover point, where your cost per megawatt is at the level where, with the incremental shipment your burn is not going up as much as the run rate for your cash burn at this point in time.

Is that the right way of looking at the what it is that you guys are trying to accomplish from a strategic standpoint?

Yes, I think you have characterized it pretty well.

It does not make any sense to push out a lot of volume at 25% higher cost if you can structure your production and structure your purchasing to capture.

So what we are trying to do is we are very focused on the repeatable, aggregatable markets; we are looking to expand to those markets.

As Jerry described, we are getting -- the megawatt gives us a faster opportunity to capture this cost out.

We're starting to see the markets get comfortable with our technology and start to move to those sizes.

You have got the San Diego Hotel, you have got the Sierra Nevada Brewery.

So I think you're characterizing it very well.

Keep in mind, all our cost numbers we throw out is all based on a nominal run rate of about 5 megawatts a year.

If you crank that up to our capacity of 50 megawatts a year, that's another 30% that comes off of either product, sub-megawatt or megawatt product.

So as Joe mentioned, there is somewhat of a balancing act between making sure that we establish ourselves in each of these 10 key segments that we have identified, and make sure we keep those early adopters happy; but at the same time put additional products out there that each quarter become more and more cost-effective.

Let me just qualify one thing there, because I said each quarter.

As I said we measure on a quarterly basis the performance of all the cost out teams.

But we don't put this into the productline until we have a group of changes together, so you've got -- otherwise administratively you will drive yourself crazy.

So we put all these changes into the productline in blocks.

So the next group, block 3, will go in by calendar year end; and that is where we will achieve the additional 25% cost reduction over where we are today.

Okay, great.

One final question on -- obviously with the shift that you guys are seeing on the megawatt scale power plant, does that put you in a better position as it relates to the RPS, Renewable Portfolio Standards, over at the LIPA and the Connecticut and also in California?

And two, more for the Connecticut and the California opportunities, so let's say that you do end up winning a portion of that, so any product that you would ship probably is not going to go until middle of 2006.

So that would have some of the cost out initiatives or success implemented in those products, correct?

What we do is incorporate all the lessons learned.

A lot of the lessons learned in cost out are similar whether it is a sub-megawatt or megawatt plant.

Some are different.

But we would incorporate those lessons learned.

But, yes, if you look at the LIPA project, we bid five 2-megawatt plants, standard 2-megawatt plants.

If we were going with the 250, we would have to put 40 units in.

It just doesn't compute.

So when you start talking multi-megawatt opportunities, the megawatt plant is the key, not the sub-megawatt plant.

Okay, that's great.

Thanks a lot, guys.

Walter Nasdeo, Ardour Capital.

I would like to quickly just touch on your backlog.

How much of that is expected to hit this fiscal year?

I would say on the dollar side, the dollar side does not capture the PPA contracts.

So I would say that on that backlog I would guess somewhere between a quarter and half of it, depending on some timing issues.

And then briefly if you could let me know how the process on the fuel cell turbine product is developing, I would appreciate it.

We are, I think, shipping the stack from Torrington in the next -- during this month, in any event.

BOP is being constructed.

We will package the two together sometime in late summer; and expect to run test it here and then ship it up to Montana, going into this Deaconess clinic in Billings, Montana.

Should ship it up by late in the calendar year.

Okay.

Is that still a Capstone turbine in there?

Yes, it is.

What type of deficiency then would you be expecting out of that total package?

We will have to see.

It is a fairly nominal.

We run this unpackaged with a catch-back (ph) and Capstone turbines set separately from each other.

It is fairly nominal now because of the inefficiencies of scale in something that small; as well as the efficiency of a small Capstone turbine.

The large units we look at -- in fact, our standard large unit design is a 10 megawatt to fuel cell and 4 megawatt turbine.

So there we're talking about in excess of 65%.

But in a small nonoptimized proof of concept type thing, all we want to see with this is, how does it operate?

We can extrapolate to the bigger units.

What happens if the turbine shuts down and the fuel cell is running?

What happens if the fuel cell shuts down and the turbine is running?

All those operational issues that you want to focus on in a small-scale before you throw in a 14-megawatt plant.

Got you.

Then as the focus continues to go towards commercialized product, where do you expect the R&D contract revenue to top out at going forward?

We generally think it is going to be similar to what it has been in prior periods or prior years.

We have a pretty strong backlog.

The backlog is about 23 million.

Year-to-date we're at around 5 million.

There's a little bit of timing issues; but historically some contracts may get delayed, there may be slower funding periods etc.

What we are also working on, on a group of projects.

So we're looking about the same level on an annual basis that we have had in the past.

There are some -- we will see much reduced carbonate activity obviously, because that is what we're rolling out commercially.

But in fuel cell turbine, we're looking at some solid oxide work, and I think there's three or four significant proposals that are in process during this summer, particularly looking at using the carbonate fuel cell but using it as a partial hydrogen generator.

So we would tri-generate electricity, heat, and hydrogen.

The hydrogen then would be used by -- in (ph) air products to purify and compress it and put it in the vehicle.

So those are the kind of activities we're focusing on more than for core carbonate research.

Sure.

That leads me to ask, how is the solid oxide program coming?

We think excellently.

We're very pleased.

All the rocky spots of setting up virtual power systems as a Company in Colorado, and then converting our Calgary operations into VPS and marrying up with the partners.

That took a six or eight-month time period.

Looking at the most recent reviews by DOE, they have been very complimentary on our units in Calgary meeting the targets for the requirements of the CICA (ph) project.

So we feel pretty good about it.

We think we're certainly one of the contenders in that horserace.

Okay, thank you very much.

Pearce Hammond, Simmons & Company International.

Just to follow up on the LIPA question from earlier, are we still looking at June 23, so two weeks from now, as far as when we will get an announcement from them?

Then secondly, I know LIPA reserves the right to not do anything if they don't find any of the proposals satisfactory.

But do you have any feeling as to which way LIPA is leaning at this point, whether they will do something or not?

No, the answer is no, we don't.

There's a very strict bidding process.

They ask us questions in writing.

We submit them answers in writing; and that is the process that they are following.

Whether it will happen -- June 23 is what they said in the request for proposals.

Whether that will remain on schedule or move to the right, I think is a big question.

So we have not bid to LIPA before, and LIPA hasn't bid on 10 megawatts of fuel cells before, so I think it is a big question mark as to the timing of going forward and exactly which direction they take.

It sounds as if the June 23 date may slip a little bit.

It could.

I have yet to see state authorities in New York or elsewhere where the schedule is at risk to some extent.

And just out of curiosity, do you have any thought as to how far it might slip?

A month or two?

I really don't.

I can't speak for LIPA.

In looking at previous bids, sometimes they have slipped; sometimes they have not.

We have got no indication from LIPA that there is any slippage at this juncture, so we are really conjecturing here what happens in these projects.

So are you going to be sitting by the phones on June 23 with champagne bottles ready to go?

I hadn't looked at my calendar yet, but I will probably stay in contact.

Then a follow-up question on the Washington wastewater treatment plant.

You have gotten a lot of positive PR there.

I was just curious if other wastewater treatment facilities have gone in and toured it; and if you were to sort of take a snapshot about potential orders that you might get from that.

I guess my question is more along the lines of a lot of positive publicity, but we're not necessarily seeing that translate into orders in the near term.

We are seeing the interest level.

We haven't seen it in orders, but we're seeing an interest level.

There is a peer review.

Since the EPA funded part of this project, the EPA has set up a 12-person I think peer review; and I think the meeting is next week or the next two weeks, where they periodically -- and these wastewater treatment people and interested people like that from all over the industry, from all over the country.

They will have a review at least quarterly on the progress and what lessons learned and so on and so forth.

So that in itself gets the message out.

There are two issues with wastewater plants.

One is since most are municipally owned they have to go through a bidding process.

It is okay if there are multiple pieces of equipment; but if we are the only fuel cell to bid, it makes municipal procurement difficult.

That is why in some cases like Santa Barbara they could buy electricity that they could not buy the equipment.

They went out on a bid process for the electricity, and we got a slight premium over gas engines.

So that is part of the issue with the wastewater plants, is how do we get around this single sourcing for equipment sale.

We only have a limited appetite for power purchase agreements, as we have talked before.

The other item, we are getting significant inquiries from the wastewater treatment industry.

These guys do a lot of planning on upgrades to their treatment plants.

It is a big capital expenditure cycle.

I think one of the differences that we're seeing now is that there is more consideration of fuel cells on the back end.

These guys might be flaring, they might be using engines.

Some of their engines are going to be at the end of their lifecycle, and what we're trying to do is we're trying to measure where are we in lifecycle and when will fuel cells -- when can we actually predict substantial order flow?

But we are getting those inquiries now, and they are coming through very well.

Certainly anybody who has talked to King County and has called us have been very, very positive and excited, but that won't necessarily translate into we have an order tomorrow.

But we are, as we lay out our proposal processes, we do see more timing related to these wastewater orders.

Then if you go to Japan, Pearce, there the government is financing building a lot of wastewater plants.

They are trying to get rid of, particularly in the agricultural communities and smaller towns, trying to dramatically improve their wastewater scenario by building new plants, which is good news for us.

But it does take time for those plants to come online, at which point they would need the fuel cells.

So wastewater is key.

I was in the UK last week.

They understand that fuel cells on a biofuel is renewable as solar and wind, except it's firm power instead of intermittent power, and is not simple station like wind would be.

So I think there's pretty much getting a broad global review of it.

We don't see it in developing countries because in many cases, they don't have anaerobic digestion, and without anaerobic digestion, then you don't have the methane that you need.

Right, and one final question.

Is there anything in a potential federal energy bill that you would like to highlight to the investment community that may be beneficial, specifically to FuelCell Energy?

Yes, the House has marked up theirs.

The Senate is in markup, I think in the next couple of weeks; go to conference probably August and September.

The Senate is a lot more positive towards fuel cells -- or the Senate bill than the House is.

We'll have to see what happens at the conference.

But basically, we and the fuel cell industry have not had a federal level incentive like solar and wind have had.

I think it is up to 1.8 or 2.5 cents per kilowatt-hour.

That would be huge for us.

In fact, we're trying to tell them all you have to do is add three words.

Where it says solar and wind, just add "and fuel cells".

Of course, the solar and wind guys don't like that, but we will have to see how it resolves.

If we don't get anything, then we haven't lost anything.

So there is only upside, since we have had no federal incentives.

Right, but you feel there is a possibility of possibly getting that 1.8 cents?

Write your Congressman.

Plus what's happening is that the marketplace is recognizing fuel cells as ultra-clean, similar to -- in a lot of states -- there's six states that actually categorize fuel cells on natural gas as renewable.

That recognition is starting to move across all of the RPS states.

So that is where Congress is recognizing it and the states are recognizing it.

So that move is in the right direction.

And I think a lot of the people are beginning to realize that wind is great, but it's a central station.

You still got to wire to those big plants offshore.

Both wind and solar you can't count on, so you got to have -- in fact, I've seen an environmental analysis if you back up the intermittent wind and solar with coal-fired power, you've blown all the good renewable that you started.

Whereas you go with fuel cell and natural gas, it's firm and yet it's local.

So that recognition is slowly getting into states like California and New York and Connecticut.

Great, thank you very much.

David Snow, Energy Equities.

I am wondering, you mentioned that the grid price of power is going up.

What is your thought about the relative movements going forward of the gas price that you are particularly sensitive to versus the grid price?

And what do you think your customers are thinking in that regard?

Gas prices are hurting us right now.

Once a customer decides to go off the grid or generate his own power, gas prices help us because it makes us -- we're so much more efficient, it helps us in the competitive analysis against engines or turbines.

Where it hurts us is the grid, in price increases are lagging the price of oil and gas, and coal is going up, even nuclear is going up.

So while the utilities are applying for rate increases in virtually every state to the PUCs, that process is a lagging process compared to the fuel prices.

If fuel prices go down, there is also lagging process, so it works coming out also.

So it definitely have an impact on near-term orders right now.

I will give you another example.

They are building a tremendous number of LNG, liquefied natural gas, plants in Japan.

Many of our industrial customers with Marubeni in Japan who are teed up for fuel cells are waiting, because the pipelines get delayed, as any big projects sometimes tend to move to the right.

So we have had several major industrial projects in Japan that have been postponed until the LNG pipeline gets to the front door.

So it definitely has an impact.

Going forward shouldn't that play to your advantage because of the pent-up increases in the catch-up of the grid price?

Absolutely.

The grid prices will go up.

Gas will be more available.

What is going to happen to the price, I don't know.

Frankly, it is a volatility issue more than the price.

If the price got to a point and stayed there, the world tends to adjust to commodity price points and make allowances.

But it is the unknown I think which is hurting it more than anything.

What grid price are you using for being economic in 18 months on the higher-end economics?

We have been using $0.10.

You can easily go up to $0.11 or $0.12.

We're not talking about small numbers here.

Okay, thank you very much.

David Smith, Smith Barney.

It's James Sanders, (ph) actually, filling in for David.

You talk about $10,000 per kilowatt, cost per kilowatt in mid 2003.

That is what it cost then.

You are going to 4,800 by the end of the year, is what you are targeting.

Where are you at today?

The DFC300MA is at $6,000 a kilowatt.

Did I hear you correctly earlier saying that the San Diego project was around 8,000 kilowatts?

Did I mishear that?

No, I think it's all timing.

PPA money coming through is a function of timing.

So that is not the question I answered.

I answered what effect would PPAs have for the rest of the year.

The rest of the year, okay.

Also last question --

Keep in mind, Jamie, the megawatt plants are 20%-plus cheaper than the sub-megawatt plants.

Where do you see your revenues ending up this year?

Are they going to be flat with last year, or a little up or a little down?

With the PPA impact, Joe, they are (multiple speakers) probably down, right?

I think what is happening is the PPA activity would probably -- revenues would be a little bit lower.

A little bit lower, okay.

Thank you.

Gary Schwab, (ph) Janney Montgomerey Scott.

On the line of the cost out, does the 20% correlation continue beyond the 1 megawatt as you go to 2 megawatt, 4 megawatt, 10 megawatt projects?

It really goes between 15 to 20 for the 1 megawatt, and 20 to 25 for the 2 megawatt.

So a 2 to 1 scale up is still not as big as a 4 to 1 scale up, but it is still big.

Right, so the 10-megawatt project would be in the 2-megawatt savings range?

10-megawatt project is five 2-megawatt plants, correct.

Okay, but I figured that logically because that would increase your volume throughput, that maybe retroactively it would accelerate the cost reduction on 1 megawatts that were done that year.

I'm not sure I understand it directly, but five 2-megawatt orders would definitely accelerate the cost out, not from a pure volume standpoint but from all of our suppliers.

If you're starting dealing with 10 megawatts of components, you start reaching different price points than you do for a 1 megawatt or a one-off type (multiple speakers).

Okay.

As far as the Connecticut contract, where that is due for 2007, do you have any idea when they are even considering awarding that?

They're talking about first awards in August, if I recall.

August of this year?

August of this year.

They have awarded -- the developers have gone to them and received I think their 0.5 development grants, engineering grants to develop the various sites.

So that they can come into Project 100 with firm developed projects rather than just a vision.

So that they actually have a location, site work, interconnects, all that worked out.

So that when they do look, when Project 100 folks look at the project they know it is a firm, realistic project that will pencil (ph) through development.

I think that first round is in August.

I know they have awarded some development contracts already back in April.

When you said they were thinking of 30 to 40 megawatts possibly for fuel cells, are they also looking in 10 megawatt blocks?

Or are these going to be just various sizes (ph)?

It is up to the developer.

Nothing less than a megawatt.

They like 10 megawatts.

That's kind of their desire.

What they have said is that they hope to get 30 to 40 megawatts of fuel cell power.

I think the state folks and the legislators who passed the Project 100 legislation recognize there are several fuel cell companies and many suppliers of those fuel cell companies within the state boundaries; and obviously they want to keep some of that work within the state.

Okay, thanks, Jerry.

You're welcome.

Okay.

Ladies and gentlemen, thank you very much.

We will talk to you next quarter.

Ladies and gentlemen, this concludes today's teleconference.

You may now disconnect.