燃料電池能源 (FCEL) 2006 Q1 法說會逐字稿

Good morning.

My name is Crystal and I will be your conference facilitator.

At this time I would like to welcome everyone to the FuelCell Energy first quarter 2006 earnings results and company update conference call.

OPERATOR INSTRUCTIONS]

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

Sir, you may begin.

Thank you.

Good morning.

This is Steve Eschbach Director of Investor Relations at FuelCell Energy.

On behalf of the executive management team here at FuelCell Energy, I'm delighted to have you join us on our first quarter 2006 conference call.

Delivering formal remarks today are Dan Brdar, President and 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 U.S.

Securities and Exchange Commission.

I would now like to turn this call over to Mr. Dan Brdar.

Thanks, Steve.

Good morning everyone and welcome to our review of FuelCell Energy's first quarter and the outlook going forward.

I am especially appreciative of your attention today since this is going to be my first conference call as the CEO.

I had the opportunity to meet and speak directly with many of you during the last year and I'm looking forward to keeping and expanding those lines of communications.

Before we get into the results for the quarter I do want to take a moment and thank my predecessor, Jerry Leitman, for his support and his ongoing guidance.

In his new role, Jerry's going to remain as FuelCell Energy's chairman and also serve as a strategic adviser to help ensure continuity during our transition.

Now to set the stage for addressing our accomplishments and outlooks, let me turn the call over to Joe Mahler for more detailed information on our first quarter financial results.

Thanks, Dan.

And good morning, everyone.

FuelCell Energy reported a net loss to common shareholders for the first quarter of fiscal 2006 of $16.7 million or $0.34 per basic and diluted share compared to a net loss to common shareholders of $19.4 million or $0.40 per basic and diluted share in 2005.

Revenues for the first quarter of fiscal 2006 were $5.9 million compared to $7.6 million in the prior year.

Net cash and investments used during the quarter was $17.1 million compared to $20 million in 2005.

The 2005 number excludes the proceeds of $99 million from the sale of preferred shares in the first quarter of fiscal 2005.

Capital spending in the quarter totaled $3.6 million, which included approximately $2.8 million for equipment built for power purchase agreements.

Total cash and investments of January 31, 2006 was $162.8 million.

Components of revenue and cost for the first quarter '06 were as follows: Product sales and revenues totaled $3 million for the quarter ended compared to $5 million in 2005.

DFC product revenue was lower due to the timing of customer delivery requirements and the production switch to lower cost DFC product models.

Cost of product sales and revenue were $9.4 million for the fiscal quarter ended January 31, 2006 compared to $13.7 million in 2005 on lower revenues.

The product cost ratios were 3.12 compared to 2.73.

Higher cost ratios in this quarter are due to spending on power purchase agreements and in this quarter increasing spare module components for the growing fleet and higher inventory as we transition to cost reduce designs.

Excluding power purchase agreements the ratio in the quarter 2.44 was in line with previous quarters.

Roughly the average of the last three quarters was 2.45.

We have completed production of 300 CFC300A sub-mega watt products which had an approximate cost of around $8,000 a kilowatt.

Now our sub-megawatts reduction consists of a modular 300MA with an approximate cost of $6,200 a kilowatt which are now beginning to be realized as they are built and delivered in the financial statements.

The next sub-megawatt unit we will have should have a product cost to sales ratio of around 2 assuming a selling price of $3,000 a kilowatt with $6,200 cost.

This is an improvement from last year with the $8,200 unit at a ratio somewhere in the range of 2.37 to 2.65.

The opportunity to accelerate the profitability is with our 2 mega watt power plant which would cost in the range of $3,200 a kilowatt and in volume under $3,000.

Dan will expound on this point.

At a selling price of $2,500 to $3,000 a kilowatt this would bring the ratio close to 1 or another way to interpret this is moving to gross margin profitability.

As we break out the mega watt model we are seeing that investment tax credit and subsidy's will be a help for our pricing.

The Company's product backlog including long term service agreements total 24.5 million compared to 22.9 million as of January 31, 2005.

R&D contract revenue for the quarter ended January 31, 2006 was $2.9 million compared to $2.5 million in 2005.

R&D margins improved in the first quarter with the cost to revenue ratio decreasing to .99 from 1.12 in 2005 due to less cost share contracts.

As of January 31, 2006, the Company's research and development sales backlog totaled approximately $12.9 million of which Congress has authorized funding of 9.1 compared to 24.7 as of $14.4 million funded as of January 31, 2005.

The Company's recently announced selection for development of a coal based multi-mega watt solid oxide fuel cell system of 10.6 million in this phase and development of a high temperature membrane for low humidity operation for pen fuel cells of 2.1 would bring that number back comparable to the prior year.

Admin and selling expenses were 4.2 million for the quarter ended January 31, 2006 compared to 3.1 million.

The most significant change in the year-over-year includes 700,000 of stock based compensation as we now have adopted FAS 123R share based compensation.

Marketing professional costs were approximately 300,000 higher on increased market development and proposal activity for R&D and commercial business.

R&D expenses for the quarter were 5.9 million compared to 5.2 million.

This increase is due to our focus on sub and megawatt cost reduction and stack life extension.

Total sock based compensation recorded in the first quarter of fiscal 2006 was 1.1 million or approximately $0.02 per basic and diluted share.

Stock based compensation is recorded in all cost and expense line items on a consolidated statement of operations.

There was no stock compensation recognized in the consolidated statements during the three months ended January 31 but please refer to the footnotes which document the equivalent expense.

Please refer to the statement of operations attached to our price release for a breakout of these expenses.

Going forward over the next two quarters we expect quarterly cash consumption to be approximately $15 million per quarter exclusive of PPA activity.

We have a strong balance sheet with 162 million in cash.

And I will now turn this call back over to Dan.

Thanks, Joe.

Let me turn to the central theme of what I want to cover in today's call and in fact what I consider my personal mission and that's to accelerate the Company's drive to profitability.

The market today demanding distributed generation solutions that are efficient, reliable and environmentally responsible.

Our DFC products address those needs and are available now.

Our strategy remains sound to aggressively reduce cost with products that meet customer expectations for performance and reliability while addressing both graphic and vertical market segments to deliver our best and largest opportunities for repeatable business.

I'm going to share a number of observations with you about the Company's business proposition, the visibility we have now to new orders and why.

First and foremost, we are witnessing market changes now that will enable us to put more lower cost product in the field.

With the multi-megawatt opportunities we see, particularly, in the states that have renewable portfolio standards we're focusing ours sales and cost out efforts on our 2 megawatt DFC3000 products.

Carrying over successes from our sub- megawatt and megawatt class cost out initiatives we believe additional; value engineering will enable us to reduce the cost of the DFC3000 power plant at current production levels to arrange between $3200 and $3500 a kilowatt and below $3,000 a kilowatt with increased volume.

This should be our first product to show positive margins and this is why we are focusing our 2006 efforts on the multi-megawatt opportunities.

At the same time, we're continuing to develop repeatable markets both in terms of geography and industry related segments.

We had success in establishing a presence in vertical industry segments such as waste water treatment, hotels and entertainment and manufacturing.

Let me take a moment here to bring you up to date on the progress and outlook in geographic terms.

In Asia countries like Korea and Japan are being driven in part by their mission to reduce greenhouse gases on the Kyoto Protocols.

This commitment by Japanese and Korean manufacturing companies favors high efficiency solutions for power generation such as our DFC products.

Japan in particular is a significant market when you consider that it has an active RPS program in place.

Due to a heavy reliance on imported fuels energy costs are high, again favoring the higher electrical efficiency of our DFC products.

During the quarter, we announced the sale of our first megawatt plant in Japan where our distribution partner Marubeni cited a power plant with electronics giant Sharp Corporation.

It's worth noting that Sharp is the world's leading manufacturer of photo-able tags yet they are installing our fuel cell to provide their base load power.

We note from discussions with our partner Marubeni and end user customers that Japanese industrial companies like Sharp are starting to turn to fuel cells to meet their Kyoto commitments.

With the next round of projects about to be submitted for government incentive funding we add visibility to another 4 to 6 megawatts of potential order in Japan clearly building on our achievements to date.

Elsewhere in Asia , our partner POSCO is working with the Korean government to help stimulate the penetration of fuel cells in that market.

POSCO is leading a task force made up of government, universities and the private sector to structure a subsidy program that is expected to total $100 million per year for fuel cell installations.

In addition to their efforts to government level they are also expanding their sales team dedicated to fuel cells.

At the current time we have visibility to 1 to 3 megawatts in potential orders there.

California continues to be an excellent market for us because of our ultra-clean status.

Since our products are already certified to meet the California 2007 emission standards we can provide an attractive onsite generation option that is exempt from electric utility exit fees and standby charges.

This year we anticipate submitting 6 megawatts of projects to the California Self-Generation Incentive Program. 3 megawatts of projects have already been submitted for funding and we plan to submit another 3 megawatts of projects in the next 30 to 60 days.

Elsewhere in the U.S., there are new 20 states and the District of Columbia with renewable [INAUDIBLE]o standard programs that require a certain percentage of new power generation to come from renewable sources.

We qualify for those program when our DFC plants operate on biomass fuels such as digested gas from waste water treatment facilities.

Moreover in a number of northeast RPS states we qualify for renewable generation even on natural gas due to our ultra-clean status.

In New York we have an outstanding proposal for a 10 megawatt project with the Long Island Power Authority.

In Connecticut we recently announced the selection by the Clean Energy Fund for a 4 megawatt project with our partner PPL Energy Services as part of project 100.

With additional project 100 bids planned for the spring, we anticipate bidding another 30 to 40 megawatts of projects above the 4 megawatts that's already been selected.

A relatively new market for us is in Canada.

With our partner Enbridge we're developing a new product for natural gas pipeline applications.

While these opportunities map to the longer term, Enbridge has identified more than 40 megawatts of potential in the province of Ontario alone.

Building on initial success in Canada another 200 megawatts of potential projects is expected to open up in the RPS states and California for similar applications.

As we mentioned during our last conference call, MTU Friedrichshafen, the parent company of our European distributor MTU/CFC Solutions was sold to a Sweden based private equity firm EQT.

We expect the transaction to close later this month at which time we expect to meet with the new owners to get a better sense of how they plan to move forward for the European market.

During the quarter we shipped two 250-kilowatt stacks to MTU and have additional 1.25 in our backlog.

We expect they will have customer citing announcements later in 2006.

Looking at broader market conditions in the U.S., natural gas prices have recently retreated from record levels reached last year.

Since that time we've seen many electric utilities requesting double digit rate hikes as they pass through higher fuel costs to their customers.

During the lag time the economics of operating distributed generation were severely impacted.

With grid supply electricity now beginning to reflect the true cost of fuel we're seeing increased bidding activity for clean onsite generation.

For example, Southern California Edison time of usage rates for large customers increased to $0.136 per kilowatt hour in March returning us to a very competitive position.

Responding to this level of perspective business, we are increasing our manufacturing rate to 9 megawatts per year, up from 6 megawatts per year.

This involves the hiring of 16 new employees and training them [prosumptionaly] across process lines.

Should we need to expand beyond that rate we're prepared to do so with additional stepwise increments.

While we're building repeatable markets, a top priority is the reduction of initial and life cycle costs for our DFC products.

This involves simplifying the product design, substituting less costly components and raw materials and improving manufacturing processes to reduce initial capital costs.

As part of of the introduction of the modular design in our sub-megawatt and megawatt class products we are also substantially improved our service ability.

As operating hours continue to increase we are better able to respond to routine service requirements which improves availability and reduces OEM costs.

We're meeting customer expectations.

I'm pleased to report that fleet availability for the 12 months ended January 31 was 93%.

This is the second consecutive quarter where our rolling 12 month availability is at this level.

Over time we project that our products will meet and then surpass the industry benchmark of 95%.

To date the fleet has generated over 94 million-kilowatt hours of electricity.

Let me wrap up my formal remarks with a review of some recent accomplishments.

One of these was a visit by U.S.

Treasury Secretary John Snow.

The White House dispatched key members of the cabinet around the country to speak about the administration's call for achieving energy independence and to gather information from the private sector.

We were one of a very few American companies to be selected as a meeting site.

As part of his visit we assembled a distinguished group of guests from industry, academia, utilities, and local, state, and federal government for an energy round table on reliability and environmental responsibilities.

Joining the Secretary and his party were connected congresswoman Nancy Johnson.

Our fuel cell energy partner PPL Energy Plus and executives from FuelCell Energy customers like Starwood Hotels and Pepperidge Farms.

They contributed vital input to this exchange from an end user's perspective and gave us an opportunity to increase recognition in Washington of our alternative energy products as an important factor in helping the country achieve energy independence.

Also in the area of government R&D we announced the selection by the Department of Energy for a 10 year $85 million project to develop a coal based multi mega watt solid oxide fuel cell system.

DOE also tapped our expertise to develop new more reliable lower cost components for specialized polymer electrolyte membrane fuel cells.

And we set a world record of 56% electrical efficiency in our sub-megawatt combined cycle direct fuel celled turbine power plant.

While all of this work is developmental in nature it speaks to our excellent ongoing relationship with DOE.

Also the research advances we make in these programs contribute directly to enhance performance and reduce cost in our current DFC product line.

My focus and the focus of FuelCell Energy in 2006 is straightforward.

Accelerate our path to profitability.

To do this we will build on our performance and cost reduction success to date with particular emphasis on our 2 mega watt DFC3000 products and capitalize on the multi-mega watt opportunities now developing in the market.

I appreciate you giving us the chance to present our update today and I now want to open up the call to questions from our listeners.

[OPERATOR INSTRUCTIONS] Your first question comes from Stewart Bush with RBC Capital Market.

Hi, good morning.

Good morning, Stewart.

I was hoping you could give us a little bit more color on the DOE project and provide more details on how the R&D funding works against the total 85 million.

The 10.6 million you noted is that just the first trench and how long is that first phase expected to take and when should we be looking for that to kick in to start up?

Yes, this is Joe Mahler.

The 10.6 is the first piece so it's phase one.

The contract works in three phases.

So the second two phases would take care of the remaining 85 million of that contract.

Okay.

And as far as when should we expect it to start and how long should that first phase last?

The first phase should last approximately some where between 2 and 2.5 to 3 years be phase one.

Okay.

Second, the cost reductions for the 2-megawatt sized product, layered on top of that, what expectation do we have for when the finalization of the tax credit rules will come through and when should we be looking for that to start impacting customers?

It is -- it's impacting customers today because they are anticipating that the rules will pretty much follow as the energy bill was written.

Our preliminary feedback out of the IRS does not appear to be really controversial at this point .

So our customers, third-party financiers are all focusing on this as if it will be as written, 30%, $1,000 a kilowatt with five year depreciation, accelerated depreciation available on these projects.

Okay.

Last question is any additional color you can give on better potential of getting project financing for some of the PPA projects?

Yeah, we are very optimistic about the third-party financing.

The challenge with third-party financing is you have to get projects that are large enough.

So for example, we're in play on the lipo project.

We spent quite a bit of time with project financiers on that.

The project looks very viable.

That would play out.

Other large projects would also look very financeable for us.

So as soon as we can get closure on some of these projects, I think we can bring to the table project financing.

The second step on project financing is that we are also working on the pooling concept in context of put a 40 million, 50 million pool or line of credit together and start to put some of the smaller projects under those windows.

Those are -- we are developing that also today but I would look to see that the larger projects would be financeable first.

Okay.

Thanks so much.

Your next question comes from John Quealy with Canaccord Adams.

Good morning.

Good morning.

A question on the dollars per kilowatt on the multi-megawatt platform.

Dan, you mentioned without volume you're at 3200 at 35 at least that's what you're targeting with volume below 3,000.

Can you comment on what type of volume is needed to get the incremental 10-15% reduction in the unit costs?

Well, the first of the ten megawatt projects that we see we think will bring it to that $3,000 level.

When you are doing these things as a one off and we we talk about 3200 to 3500 that basically assumes we are making one of them.

We really don't have a lot of collective purchasing power.

So it doesn't take much volume to start to get that price to drop quickly from a purchasing standpoint.

So I would expect the ten megawatt project to end up around that $3,000 number.

Okay.

Great.

Since we are on ten megawatt projects, can you give us an update?

I realize Long Island is fairly tight lipped about what's going on but how that project has evolved and what your expectations are as that process moves forward?

What they indicated to us is that they came back and asked us if we would extend the validity of our bid to the end of March.

We do know that they have a board meeting for like in March.

So we are hopeful at that point in time that we're going to hear something.

Similar events happened in the past where they had a board meeting and all they came back with was an extension.

What we are doing in this point in time is wanting to make sure that they know we are still interested in the project, that our proposal is still valid and we're just going to have to let events play themselves out.

My last question here, you mentioned Enbridge looking at 40 megawatts of potential among Ontario.

Recently they have been pretty active in the renewable space on the wind side.

I realize that you are not part of their plans in terms of privy to all their plans but can you talk about where the fuel cells are in order of priority with the relationship with Enbridge.

Give us a little more back ground there if you could?

Yes.

I think it's important to recognize that Enbridge because of their dominance in that marketplace, their looking at trying to have a portfolio of technology.

And the fact that you do wind projects which are intermittent and you can put a fuel cell with it that is put in assets that they already own, their city gates, they're very complementary to one another.

Joe you may want to add more to it in terms of how we sit with other things they are are doing as a company and looking at renewable energy.

We think we are pretty high on their strategic planning with fuel cells.

We know that the CEO of Enbridge has visited Ottawa.

Canada has a billion dollar technology development fuel cell development program.

We are working closely with Enbridge to isolate a significant amount of that funding to help foster stationary.

We know that Toronto has got significant issues with generation.

They are running into NIMBY issues on nuclear.

So the Canadian market, which to be honest with you, a couple of years ago I would tell you I was on a kind of a hydro-nuclear market has really started to embrace distributed generation and renewables as quickly as possible.

And they are devoting quite a bit of money to those programs.

So we are pretty and you said that how privy we are to Enbridge.

We work very closely with Enbridge so we are a little more privy than you might have been thinking at the start of your question.

So we see a lot of activity from them.

We're expecting them to move forward on the ERG product.

They are going down the list of things that have to happen to bring that product to fulfillment and we see them executing at this point.

Okay.

Thanks, guys.

Your next question comes from Sanjay Shrestha with First Albany.

Great.

Good morning guys.

A couple of quick questions here.

First , the success with your DCF product on the sub-megawatt level.

Now does that make you guys feel like you are focusing on megawatt class product, that's something you sort of need to sort of focus on the larger scale unit?

Is there any internal planning going on for the larger scale hybrid power plant of that nature given that the economic value proposition of this product could be very attractive?

Part of what we are doing right now is aside from just doing our own internal planning, we are also starting a process of meeting with our distribution partners to get input from them on what they think is the right fit for their particular markets.

Because for example, the right product for Japan may be a little different than what we see in the U.S.

The advantages, all the things that we are doing on cost reduction for the simple cycle products will apply directly to that DFCPT product.

Okay.

But you guys, I guess before you really move forward aggressively are then waiting for some of the customer feedback in terms of the limited 10 megawatt and 10 megawatt, 4 megawatt, 2 megawatt.

Am I understanding you right?

Right.

I mean if you look at just a pure cost standpoint, the larger products are clearly going to be where this is going be the most competitive.

Some of the feedback we are getting from Japan is since the in industrials are making decisions to put fuel cells in to meet their Kyoto Protocol commitments, they're telling us they see an interest in the sub-megawatt product as well.

So we're going through some discussions with them to figure out what exactly what's the right size product to introduce.

Because we want to make sure we come out with with the one that is most likely to be successful.

Got it.

Got it.

Okay.

So now kind of follow-up on John's question there about the 40 megawatt opportunity with Enbridge.

Obviously you are in a lot of constant dialogue with them.

Is that - that's a pretty big number.

Is that something that is going to start to really flow into the company as a new bookings potential here in fiscal '06 or is that a lot of ongoing discussion at this point and kind of sets the stage for fiscal '07 or how should we think about that.

First they will want to do a project that is under their control from a demonstration to demonstrate to the Canadian government that the monies that they are asking for should be applied to BFRCG.

That we expect to happen here sometime this year.

We may also see them bidding one of the project and project 100s coming up here in Connecticut.

But in terms of capturing the 40 megawatts that are city-gates that they own and control in Toronto I think that is going to be a little bit longer term.

Okay.

But we do see some pretty near term opportunities in project 100 and their own demonstration project in Toronto.

Got it.

That was going to be my next question actually.

On this project 100 obviously this 30 to 40 megawatt is a pretty big opportunity for you guys.

And you got 10 megawatt on Long Island Power Authority makes it that you have one of the best bookings prospect in the company's history.

So how should we think about this 30 to 40 megawatt?

Obviously,you have the capability of manufacturing it if it hits.

Is it going to come piece by piece or can you go into some more details on that, how do you expect it to unfold?

Yes.

I expect it's going to happen is based on our discussions with the Connecticut Clean Energy Fund they are going to issue their solicitation.

They're targeting the middle of March.

Okay.

There be about thirty days to respond to that.

So mid-April proposals will be in.

They typically take a few weeks after that to make selection so we'll be into early May at which point they will announce which projects they selected to go forward.

At that point there's not a lot of further competition.

It's then a matter of doing the negotiations between the project developer and Connecticut Light and Power and then those projects getting approved by the Public Utilities Commission.

Okay.

Now do you anticipate, obviously, these are things that we don't know until we get to that point but do you potentially see any major pushback from a Public Utility Commission standpoint?

Well, the first project that we got right now that was selected with PP&L was going through that process.

And that process is going pretty smoothly.

The first test for us was going to be, did we see pushback from Connecticut Light and Power.

Just to note the desire [inaudible] keep [inaudible] out.

And we're not seeing that.

The discussions between PPL and and CLP have been pretty positive.

Okay.

Now, Dan, your prepared comments said that the Company's goal is to get to profitable territory and obviously you guys are making some good progress here on the cost reduction front.

Two questions related to that.

One, if you get 10-15 megawatt new bookings here in this year where could you see your cost at the the end of the year/ And number two, now with a cost out strategy is there any new target megawatt shipment number to get to that gross margin break even and then eventually the operating margin break even?

Is it any different than it used to be before?

I think what we targeted previously still looks valid.

I mean if we are going to focus on the DFC3000 that is going to end up around $3200 a kilowatt.

If we hit the first of these ten megawatts that puts you closer to $3000 a kilowatt.

The thing that has come into play that we are going to have to see how is unfolds on these bigger projects is when we were [INAUDIBLE]y setting these targets the investment tax credit didn't exist.

That's right.

So as these projects go forward if we are going to be able to get them done in time to capitalize on the investment tax credit it means the ability to hold price and may mean we may be able to bring that number down in terms of the number of megawatts it's going to take to get through gross margin break even.

Especially since it looks like their going to be skewed towards the 2 megawatt product.

Okay.

That's great.

Thanks a lot, guys.

Sure thing.

Your next question from Walter Nasdeo with Ardour Capital.

Good morning.

Good morning.

I have a couple of questions.

I like to - is it possible you can you give us an update on the relationship with Chevron Energy Systems and how that's developing?

I haven't heard anything for awhile.

Yeah, actually you haven't heard much from Chevron recently because they're busy executing a couple of orders that they put into us earlier in the year.

The Santa Rita jail project is one they have done.

That's off proceeding nicely and they have another project that they are busy executing.

In fact, I was speaking to some of their management team just a couple of days ago.

We had a pretty significant event with them with the San Francisco Post Office where they basically had a large media event to celebrate all the things they are doing at the post office facility including the installation of our fuel cells.

So I think as they complete executing the couple of projects they got right now you'll start to see more activity out of them.

And we know some other opportunities that they are chasing right now.

And can you give -- Joe, can you give a little clarity on the 24 million backlog as to when that is going to start hitting the income statement?

Yeah, that 24 million probably stretches over the remainder of '06 and then probably a good six months into '07.

Okay.

And you mentioned in the release that there were some issues on quarterly revenue with customer acceptance timing and things like that.

When do you -- when do you expect to get that revenue booked that we were expecting here in this first quarter?

Our expectations.

What's happening is that we are in little bit in transition on the new MA product designs so we are kind of retooling our inventory.

We have actually increased the inventory in the quarter.

That revenue will actually should start to increase really starting next quarter.

Okay.

So would you then expect, you know, in kind of rough estimates something like where we ended up the fourth quarter again going for the second quarter as far as revenue goes?

To build off of?

Yes, that -- yes, to come off, you know, we got a fairly low quarter this quarter.

Yes, I think that is probably not a bad way to talk about it.

Okay.

Thanks a lot.

Yes.

Your next question comes from Pearce Hammond with Simmons & Company International.

Good morning.

Good morning.

How many kilowatts did you ship in Q1?

One and three quarter megawatts.

One and three quarter mega watts.

We shipped San Francisco Post Office four Sharp units and some MTU equivalents.

And - just picking up what Walter was just talking about.

Are you willing now that Q1 is out of the way willing to give revenue guidance for the year?

No, we are not ready to give revenue guidance.

We have 24 mega watts.

I did give some timing suggestion of that.

Okay.

On the 24 million on the backlog.

Yes.

Okay.

And then if you would just refresh the break even numbers on an operating income basis both as far as the megawatts sold as well as where you would see that on a revenue basis?

And if you're looking at a megawatt basis we'd see gross margin break even in in the 35 to 55 megawatt size range depending on product mix.

And then cash flow break even 75 to 100 again depending on product mix.

Yes, I think the exciting thing, Pearce, is that if the model, you know, we got sub-megawatts, we got megawatt plants.

Our design costs for the sub-megawatt that we have right now is about $4,600 a kilowatt.

The megawatt is $4300 a kilowatt.

So mix is really very important.

The exciting thing we see to reiterate is that if on a 10 megawatt mult-megawatt project we think on a 2 megawatt plant is around $3,000 a kilowatt.

If our model goes fully multi-megawatt then we probably we have some opportunity to redue those numbers that Dan described.

The 35 to 50 and the 75 to 100.

So I mean I think that is a pretty exciting opportunity for us.

Okay.

Great.

And then Dan, just out of curiosity, in your opinion since you have been at FuelCell Energy, how have you seen the DG, the distributed generation market evolve over the past few years and not necessarily specific to FuelCells but the DG market in general?

Because I know that there is some new environmental restrictions that are going to kick in the next year and the beginning of 07 that have some people worried about the DG market.

Any thoughts there?

Yes.

What we have seen happening is a couple of things.

In general there was a lot of things that went on just because of the fluctuations in gas prices that kind of stalled the DG market as a whole.

So people overlooking putting in base flow tower.

We have worked through that now.

We have seen gas prices come back down.

But the big driver that we see that is really hurting some technologies and helping others is the environmental constraints that just continue to get ratcheted down.

What we see in California is the engine manufactures are really concerned about their ability to meet the 2007 standards.

You got folks like some of the people at South Coast Air Quality Management District who really don't want to see more engines go in.

That creates a great environment for us.

If you look at what is happening elsewhere, you've got you know, in both Asia and Europe you have serious commitments to meet the Kyoto accords which means people are making decisions not just purely on economics for the power generation but need to find ways to reduce the CO2 from their facilities.

And we're playing into that as well.

So efficiency is certainly becoming an important part of it.

The other piece just in terms of DG is the fact that if you look at the clean choices that are out there that everybody is getting pushed to, we are the only one that is really is complementary to solar and wind.

Because we are firm power.

There's these solar and winds, their intermittent.

And we are the nice firm component to that.

So it's turning out to evolve in a way that really fits our product.

And what we have been trying to do and fortunately it's going to make it tougher for some of the traditional technologies that we have been competing with to maintain the market share that they have.

So it's definitely playing into your hands as far as those environmental rules in California that start like January of '07.

Absolutely.

In fact, if you look just from the California standard.

We have been certified to the 2007 standards for a couple of years now.

So we have had a significant lead there.

Plus, you know, when you start to see things like when Secretary Snow showing up, we now have an interest in our products getting recognized as a real alternative for problems at the federal level.

Both in terms of things like rebuilding after Katrina and also the federal government as one of the largest users of energy in the world trying to find ways to use energy more efficiently.

We play into that pretty nicely.

Another question on solid oxide fuel cells in what you see in that space moving forward as far as the cost declines relative to molten carbon?

And how competitive do you think the solid oxide fuel cell, say for example, the Versa product will be up against the molten carbonated technology in say five years?

Well, I think the first thing to remember is they are competing in two different spaces.

The solid oxide activities are really for smaller plants.

Their 5 kilowatts up to maybe 100 kilowatts for the opportunity that is really in front of them and they're part of a long-term development process.

The challenge for solid oxide is they're going to have to come down the same cost curve five years from now that we're coming down right now.

So I think to some degree they're always remain complementary to each other.

They're probably going to be put into some different installations than ours.

Carbonated is going to be large scale multi-megawatt kind of power plants.

You eventually see the solid oxide go to the very large scale solid oxide turbine work that is based on coal-gasification.

Those projects will tend to be 100 megawatts and larger.

So I think that what you see, they are each going to have their own unique fit and there's probably not going to be a lot of direct competition between them.

Okay.

Thank you very much, Dan.

Sure.

Your next question comes from Rob Stone with Cowen & Company.

Good morning, gentlemen.

Good morning.

I wonder if you could just elaborate a little bit on the comments you made about producing spares as part of the higher cost of product this quarter and just some sense of how you think about spares and O&M costs over the current generation of products?

What we are seeing in -- is that as our fleet grows, you know, one of the things that we are transitioning from now is taking the next developed product, you know, and incorporating that out, you know, into the fleet.

So for example, we had issues with sealing last year.

We made all of those improvements.

So we are actually moving beyond that kind of R&D operations phase where we were finding issues and going out to fix them.

Now what we are finding is that we are getting much more routine responses.

We have mean life data now.

What we are doing is starting to build up very important aspect of distributed generation in the field.

It has come across clearly in our survey material is that our ability to respond is a very high item to the customer.

They really want to work with us.

They love their fuel cells and our ability to provide service and to respond quickly is a key driver.

And what we are doing is we are in effect maturing our service whole service parts area.

We are buying the parts that are necessary based upon this mean data and it is part of the logical path of, you know, maturing the product line and maturing the company.

Guess I certainly understand that process.

I was wondering if you could comment on what you think would be target metrics for over the life of a system or over a five year period how much of the base cost of a typical installation you would expect - ?

I should have added to that.

I meant to answer that question, too.

And what we are looking at right now is about $0.025, you know, depending on the installation. $0.025 to $0.03, $0.035, somewhere in that range.

We are trying to match up really with resips and turbines would have in the marketplace.

We're looking at competitively looking at continuous - you know most of what we compete against right now is continuous running resip engines and those numbers appear to be coming right into the range.

We think competitively those are good numbers and that is what we are seeing.

Okay.

A question on legislative efforts.

I notice after your round table meeting that Rep Johnson made a comment about extending the tax credit from the 2005 energy bill beyond two years to ten years.

Have you seen any further developments along those lines and potential for crafting that into legislation for this year?

We obviously brought that up with both Congressman Johnson and with Secretary of Treasury Snow.

It got a terrific response from both.

They thought it was excellent that we are thinking ahead.

They said that they would immediately go to work on that.

They -- they are both interested in and they were both interested in making that happen.

I think a lot of the onus will come on Congresswoman Johnson at this point but she has been very active on the tax side of the house.

She understands how those bills are written and she was very very positive about the ITC being extended.

Thanks very much.

Your next question comes from David Snow with Energy Equities.

Yes, I appreciate the opportunity.

I'm trying to figure out how the large-scale projects evolved, the 10,000 megawatts or 4,000 megawatts.

Was is just simply the concept of hooking these things together in a 6 pack or something and scaling up an already large-scale product?

And how long has this been underway?

Can you give us a little more color on that because it seems to be possibly the critical path you're going to take out to the market.

If you look at these projects they have their genesis really on some of the legislation that was passed here in Connecticut because Connecticut wants to do two things.

One, is they want to stimulate the fuel cell marketplace because we have got companies like FuelCell Energy that are here and will create jobs in Connecticut.

But they also realize they've got to do some things to find ways to meet the renewable portfolio standards commitments.

So some legislation was passed that enable these projects to come to the stage where they are bidding.

The way we are approaching these is we tend to do multiples of our 2 megawatt units because crates are a flexible arrangement in terms of the size of the ultimate project.

But what we also see is that there is a desire to have bigger projects because the folks that run the transmission grid, the independent system operators typically don't deal with less than 10 megawatts being put on the grid.

They've established those rules pretty clearly so the projects have had some pretty good scale in order to make sense to be a grid connected project that satisfies the renewable portfolio standards.

So for us it is creating a great opportunity and what we are going to try to do is to capitalize on it here pretty quickly.

Joe anything to add to that?

I think that is pretty good.

And you've expanded out from this Connecticut experience to a marketing tool and product for elsewhere, I guess?

Yes, and what's really great about what Connecticut has figured out is all these states are looking at their renewable portfolio standards.

Look at New York for example.

They are looking for 3700 megawatts of renewable power by 2013.

But what they are all struggling with now is what's the model to implement it.

So what we have now is a situation where Connecticut through their leadership created the model and the other states are now looking at that model as something that they can adopt rather than try and create their own new version of implementation.

If some other state entity has figured out a way to implement the program they are most likely going to try and copy it.

Is is there an upside limit as to where you lose your competitiveness versus the conventional central power?

What is the upside beyond 10 megawatts for example?

If you look at most large combined cycles that go in they tend to be hundreds of megawatts.

So the advantage that we've got is we can do several tens of megawatts in a disbursed arrangement that address issues with grid constraints like exist in Southwestern Connecticut and New York and get away from the issues associated with large central station power where you have to string transmission lines.

So the project sizes that we got available to us could be anywhere from 10 megawatts to 100 megawatts.

It 's going to be purely a function of where the load pockets and where can we tie in to actually support some of the grid problems that are out there.

Is there siting difficulties that you start to encounter as you get into the bigger sizes?

No, because the great thing about our product since we are ultra-clean we are actually either exempt from the permitting process in many states or on an accelerated path.

And that stays true regardless of the size plant you are looking at for us.

And now that you mentioned the combined cycle how does your , I think it was 58% efficiency compare with the combined cycle central generating plant?

Isn't that about on par with it and shouldn't you get higher than that to compete or were do you stand on that.?

That is comparable with a very large combined cycle but remember that combined cycle now that power has to been transmitted over our transmission and distribution system.

So if you look at what actually goes into the rate base by the time you transmitted power from a large combine cycle that 57 to 58% ends up being more like 47-48% because of the losses to the transmission system.

So you're very happy with that 58% as a go forward benchmark to build on in scaling up?

Yes, because what we are really competing against are other distributed generation technologies in that size range and those tend to be in the 30 to 35% range.

So --

They just --

How far is it 'til you get this one through the hoops and on to the market?

Well the unit that we just demonstrated is getting ready to ship to an end user site this month.

So we will get a little time at an end user site and we're to spend a little time with our distribution partners to figure out what is the right size product to bring to market for the fuel cell turbine.

A great.

Thank you very much.

Sure thing.

Operator looks like we have used up all our time.

So I think we've probably had our last caller here.

Okay.

Do you have any closing remarks, sir?

I just want to thank everybody for joining us.

I really appreciate people spending the time and asking a lot of good questions.

Look forward to having more discussions with all the people over time as people come through and visit us and see how we are doing and as we get out to meet some of the analysts and institutional investors.

Thank you for joining us today and we appreciate it very much.

Thank you.

This concludes today's FuelCell Energy first quarter 2006 earnings result and company update conference call.