燃料電池能源 (FCEL) 2007 Q1 法說會逐字稿

Welcome to today's teleconference.

At this time, all participants are in a listen-only mode.

Later, there will be an opportunity to ask questions during our Q&A session.

As a reminder, this call may be recorded.

I will now turn the program over to Lisa Lettieri.

Please go ahead.

Thank you, operator.

Good morning, everyone, and welcome to FuelCell Energy's first quarter results conference call.

Delivering formal remarks today are Dan Brdar, Chairman and CEO, and Joe Mahler, our Senior Vice President and Chief Financial Officer.

Before proceeding with the call, I would like to remind everyone that this call is being recorded and that this presentation contains forward-looking statements, including the Company's plans and expectations for the continuing developments in commercialization of our FuelCell technology.

Listeners are directed to read the Company's cautionary statement on forward-looking information and other risk factors in its filings with the U.S.

Securities and Exchange Commission.

I would like to now turn the call over to Dan Brdar.

Dan?

Thanks, Lisa.

Good morning, everyone, and thank you for joining us on FuelCell Energy's first quarter conference call.

As many of you know, our strategy for attaining profitability is to drive down the cost of our products to become increasingly competitive with grid-supplied electricity while expanding our market penetration in repeatable and renewable portfolio standards markets.

The recently announced POSCO Power alliance is strategic in that it helps us with both tactics, lowering the cost of our products and additional market penetration in a rapidly growing multi-megawatt market that regards clean energy as a high priority.

POSCO Power is an ideal partner for us in Asia, with the kind of expertise and purchasing power that will be a huge benefit to us.

And the 2.4-megawatt order we announced yesterday morning for two DFC1500s is certainly an early indicator of POSCO's ability to deliver orders for multi-megawatt grid support applications.

This will be our largest installation in the world and will serve as an effective demonstration of our DFC power plant's role in addressing global warming.

Beyond POSCO, we have a healthy pipeline of business in California, where the regulatory environment requires greater amounts of clean power, and we're bidding a number of megawatt-class projects.

We just announced the order from the city of Riverside, California for a 1-megawatt plant that will run a waste water treatment facility on biogas.

In a few short weeks, we will hear which projects were selected by the Connecticut Clean Energy fund for Project 100.

We bid, in cooperation with our distribution partners, over 98 megawatts of projects, ranging in size from 2.4 megawatts up to 28 megawatts.

As evidenced by our recently announced orders, our strong order pipeline continues to move to megawatt and multi-megawatt installations, which is our fastest path to profitability.

I'll go into more detail about the markets and our plans, but first I'll turn the call over to Joe for a financial review.

Joe?

Thank you, Dan, and good morning, everyone.

Total revenues for the first quarter of fiscal 2007 were $6.8 million, compared to the $5.9 million reported in the first fiscal quarter of 2006.

Product sales and revenues were $4.9 million, compared to $3 million, and research and development contract revenue was $1.9 million compared to $2.9 million in the prior year quarter.

Product revenue included $1.8 million from the sale to Sierra Nevada of the power plant that was previously operating under a PPA.

Product revenue backlog, including long-term service agreements, increased to $36.7 million, compared to $24.5 million at January 31 and $27.9 million at October 31, 2006.

Backlog is increasing primarily due to orders for component sales, megawatt-class products, and service contracts for our customers.

Research and development revenues were lower year-over-year and sequentially as the Company is transitioning the solid oxide fuel cell development programs to the new large scale coal gas program announced in October.

Research and development backlog at January 31, 2007 was $29 million, up from $13 million a year ago.

The net loss to common shareholders for the first quarter was $20 million or $0.38 per basic and diluted share, compared to a net loss to common shareholders of $16.7 million or $0.34 per basic and diluted share in the same quarter last year.

The higher loss is due to an increase in inventory related to DFC 1500 and DFC3000 products and long lead components.

These amounts are adjusted on receipt to net realizable value, which has the impact on our P&L.

And an increase in research and development year-over-year focused on cost reduction related to our multi-megawatt products.

R&D costs, while higher than the prior year, are flat with the prior quarter, as we increased our engineering staff at this time last year.

G&A costs are in line.

The ratio of cost of product sales and revenue was 2.73 to 1 from 3.12 in the year-ago period and 3.19 in the prior quarter.

The cost ratio was favorably impacted by the sale of the power plants of Sierra Nevada Brewery, offset by the increase in inventory.

Net inventory increased $6.8 million in the quarter, as we are building inventory in anticipation of megawatt and multi-megawatt orders.

The inventory build affects P&L to the extent of adjustments for net realizable value, which varies by-product line.

Our product costs are being realized as expected under our cost-out target program.

Total cash and investments at January 31, 2007 was $98.3 million.

Subsequent to January 31, POSCO Power invested an additional $29 million in cash, and the Company issued $3.8 million unregistered common shares, adding strength to our balance sheet.

Net cash and investments used during the quarter was $22.3 million.

The increased cash use over recent quarters is due to the increase of inventory totaling approximately $6.8 million during the three months ended January 31, 2007.

We have increased inventory, as I said before, with the DFC1500, DFC3000 power plants, and long lead components.

Cash used on CapEx in the quarter was approximately $1.6 million.

Depreciation expense for the quarter was approximately $2.4 million.

With the addition of the cash investment from POSCO, declining product costs, and increasing order flow, we are well positioned to grow our key markets.

Dan?

Thank you, Joe.

We're pleased to report that we're continuing to make considerable progress in achieving our goals.

The POSCO Power agreement and investment that we announced late last month, along with megawatt and multi-megawatt orders we announced this week, are good examples of this progress.

South Korea identified fuel cells as one of the Top 10 drivers for their economy, and late last year established an incentive program that provides up to $0.28/kilowatt hour for stationary fuel cell installations.

With this level of national support, we thought it was imperative for FuelCell Energy to develop an expanded relationship in Korea to broaden our megawatt and multi-megawatt markets and continue our cost reduction efforts.

That effort culminated in the recently announced POSCO Power relationship.

With this step, we've aligned ourselves with a major Asian steel manufacturer and its subsidiary power company, the leading independent power producer in South Korea.

As a major power producer, POSCO Power has the market presence and utility relationships to successfully deploy multi-megawatt fuel cells for stationery power generation in Korea.

In addition, POSCO Power will employ its expertise in power plant design, its global sourcing capability, and access to lower cost labor to build on FCE's cost reduction efforts.

Their primary focus will be continued cost reduction on the balance of plant equipment for our DFC power plants.

By using components and subsystems manufactured in Asia and assembling the balance of the plant in Korea, considerable cost savings can be realized.

As part of their commitment to this effort, POSCO Power will build a dedicated facility for the balance of plant manufacturer.

We expect them to identify the site for this facility in the coming weeks, and we believe they are well positioned for success.

At the same time, we're continuing our own cost-out program.

For 2007 production, the current cost of our sub-megawatt DFC300 is $4800/kilowatt, and the 1.2-megawatt DFC1500 is $4300/kilowatt.

As we go through the year, we'll be implementing the value engineering and material sourcing changes for these products that were successfully implemented for the DFC3000.

This should reduce our product costs another 20% to approximately $3800/kilowatt for our 300 kilowatt products and $3400/kilowatt for our 1.2-megawatt product at our current production volume.

Units at these cost points would enter production in 2008, and as our production volume increases, these costs will continue to decline.

As a result of our own cost-out success, I want to emphasize that it does not take much incremental volume to drive positive gross margin for our products.

At an annual production rate of 35 to 50 megawatts, depending on product mix, we become gross margin positive.

With increasing repeatable order flow from California and Asia and some moderate success in Connecticut's Project 100, we will be approaching the type of volume needed to achieve our objectives.

In addition to our value engineering and sourcing efforts for cost reduction, we're also aggressively pursuing some key technology improvements that will benefit all of our products.

The first of these is an additional increase in the amount of power we can generate from a fuel cell stack.

Last year, we announced a 20% power uprate for our products.

That uprate affectively reduced our product costs by 20% on a dollars/kilowatt basis.

We're currently testing our next plan of 15% uprate in our labs and have successfully completed the first phase of testing in a subscale stack.

While it takes extensive testing to confirm the improvements before we implement them in our commercial products, our progress to achieving the next uprate is on track.

The second area of technology improvement is producing units with substantially longer stack life.

Today, stack life is a major contributor to fuel cell lifecycle costs.

Units that we have been producing have a stack life of three years under normal operating conditions.

We successfully completed extensive testing of a new stack design that's expected to provide five-year stack life.

Our efforts are now focused on implementing the changes in our manufacturing facility.

In future calls, we'll keep you apprised of our progress on these efforts.

Turning to Project 100, we're enthusiastic about the potential orders that could come from the 98 megawatts of bids we submitted in December.

We don't know how many megawatts of orders we'll get, but we are confident that we put together very competitive proposals and anticipate winning our fair share.

We'll know soon.

What we do know is that we are ready to respond to increased order demands.

We've completed a thorough assessment of our supply chain and their capabilities, and our plant has the equipment in place to produce up to 50 megawatts annually.

With modest success in Project 100, we'll have some hiring to do in our facility, but we're ready to move forward.

Connecticut has targeted at least for 400 megawatts of clean power additions under its RPS mandate.

Although wind and solar have their parts to play, fuel cells are the only technology that provide multi-megawatt power 24/7 without NIMBY issues.

The bottom line is, if you want to make a significant low profile, cost efficient impact on CO2, NOX, SOX and particulate matter, the solution has to involve fuel cells.

The world is addressing this and California understands this.

At this point, it's becoming increasingly clear that we're witnessing a fundamental change in attitude about energy and the environment in this country.

Over the past six months, environmental issues that once divided Americans no longer seem quite as controversial.

Politicians, state governments, Fortune 500 companies, and public institutions no longer debate whether global climate change is occurring but are instead focusing on what can be done about it and when.

While most of America is still looking for its first serious initiatives, California has once again taken the lead on environmental and energy policy.

As one of the world's largest economies, California chose to tackle its own serious energy problems head-on by crafting specific legislation and policy actions to reduce pollution, conserve energy, and encourage the use of ultra-clean power generation.

We've seen this in the successful self-generation incentive program that encourages onsite power generation and is enabling our growth in California.

This program was recently extended to 2012.

We and our customers have utilized the SGIP program to reduce the capital cost of our fuel cell installations.

And there's more under way for the state and the utilities to stimulate ultra-clean power generation.

In December, Governor Schwarzenegger signed California's landmark Global Warming Solutions Act, known as AB 32, which sets strict limits on greenhouse gas emissions such as carbon dioxide.

Carbon dioxide emissions are directly related to efficiency.

The more efficient the source of power generation, the less carbon dioxide it produces.

Our DFC units are the most efficient way to produce power in their size and, as a result, can play a significant role in reducing carbon dioxide.

As a result, this law is expected to significantly enhance the competitive market position for our products.

It's in this environment that FuelCell Energy has emerged as a leader in providing our unique combination of ultra-clean electric power that's available around the clock.

Yesterday, we announced our latest order from the city of Riverside, California for a 1-megawatt power plant that will run on anaerobic digester gas at the city's wastewater treatment facility.

Two weeks ago, we dedicated a 1-megawatt power plant at California State University, Northridge.

A senior member of the California Air Resources Board, the agency that polices the state's tough air quality standards, commended FuelCell Energy for providing a concrete means for reducing greenhouse gases and cited our customers as examples that other California institutions should follow.

As a result of our success, California continues to be a leading market for us with 11.5 megawatts installed and in backlog.

Our order pipeline in California continues to grow.

We're leveraging our existing installations, wastewater treatment plants, manufacturing sites, and public institutions to showcase our products and demonstrate their value in addressing California's higher electricity costs and strict environmental regulations.

Looking to the remainder of 2007, our goals remain to reduce the DFC300 and DFC1500 costs by another 20% by the end of the calendar year, increase megawatt and multi-megawatt orders in all our target markets, complete manufacturing implementation of our five-year stack life design, demonstrate a 15% increase in stack power output, and manage cash in line with market demand.

We will, of course, keep you up to date on our progress.

Thank you for your attention, and I would now like to open the call up for questions.

Operator?

[OPERATOR INSTRUCTIONS]

We'll take our first question from the site of John Quealy from Canaccord Adams.

Please go ahead.

Hi, good morning.

Good morning, John.

A couple questions.

First, Dan, you made mention on the inventory build and the potential for hiring some new workers, anticipating some of this new order flow.

Can you give us a magnitude on number of hedge you're looking at, that sort of stuff, in what locations?

Yes.

Most of the hiring we're talking about will be at our factory in Torrington.

And that, really, is directly related to how many orders that we get.

If we get, pick a number, 10 to 20 megawatts out of Project 100, we'll have to go to a second shift in Torrington.

That's probably 100+ people.

If we get more than that, we might have to go to a third shift.

So most of the hiring's going to be, really, the factory labor that we need to produce more units.

And you bring up a good point in terms of the handicapping of the Connecticut 100.

Obviously, there's a lot of competing technologies outside of fuel cells for that.

What would you folks be happy with in terms of hitting your milestones?

And, obviously, any one of these orders would be the largest ever in the industry.

But what's your prediction, if you will, or handicap, and what would you folks be happy with and put head count to work?

In terms of handicapping, it's a little tough because the Clean Energy Fund has been pretty closed about the process, so we don't have a lot of insight into it.

But I would look at anything more than 10+ megawatts as being a huge win for us.

I think we have the potential to do more, but only time will tell.

We're close enough that it's just a matter of weeks before we've got some pretty good insight into how we did in that process.

Great.

And then, just my two last questions.

One, on the self-generation initiative in California, I know you folks have done a great job of getting some of that funded business, getting there early and getting a lot of it.

Can you give us a little bit more details now that it's been extended to 2012?

Are more technologies available or companies to come in with some gensets to try to get for that or get that business, or how are you looking at that initiative in California?

Actually, it's getting increasingly more difficult for things like gensets to come in.

It's getting to be a situation where we have the ability to capture an increasing amount of those dollars for our own customers, just because the pressure on engines has already been really significant.

And now, with some kind of CO2 legislation coming into play, they are going to have a hard time in that market.

And that's my last question.

I always, I always hit you on the CO2 question.

And it now sounds like we've got some major macrodrivers towards CO2.

Can you comment on conversations you've had with partners or customers about CO2 mitigation, and how your fuel cell stack plays a role in that, whether it be just providing the equipment sale or potentially sharing in any emission credits?

How are you looking at that opportunity?

Well, we've got some strong partners that have a lot of presence in that market out there.

I think what we're all waiting to see is exactly what goes into place in terms of how the programs are implemented.

But I think what everybody realizes is, with us being the most efficient way to generate power out there, it's going to be a strong benefit for us.

So we'll just have to wait and see how the official rules unfold.

But what we're seeing is an increase in market activity, and, hopefully, there will be a chance to actually trade in some carbon trading for our partners, as those mechanisms get put in place.

Great.

Thanks, folks.

Sure.

We'll take our next call from the site of Pearce Hammond from Simmons & Company.

Go ahead, please.

Yes, good morning.

I was wondering if you could quantify the percentage of CO2 reduction from a DFC system versus a standard genset.

It's -- if you look at a genset being 35 to 40% efficient, we're close to 50% efficient, it's a direct relation -- direct ratio of those two.

So we're producing 50% less CO2 per kilowatt hour versus the combustion-based kind of technology like a gas engine or a gas turbine.

Okay, great.

I appreciate the quantification on the megawatts necessary for gross margin breakeven.

Would you care to refresh your thoughts on gross margin, operating margin, and net income breakeven levels as well for total number of megawatts?

We'll see how things flow through the P&L here, but our expectation is from a cash flow standpoint, we would go cash flow positive at 75 to 100 megawatts, again, depending on mix.

With our growth really tending to be more than megawatt and multi-megawatt class, it looks like we're going to be at the lower end of that range.

Okay.

And is there any additional debottlenecking you might have to do at Torrington to meet the -- to have the 50 megawatts of capacity?

No, the big challenges that we would have, really, are just getting people on board quickly.

The equipment we've already run at a 50-megawatt rate, so we really don't have any key issues there from an equipment standpoint.

It's just getting people on board, trained, and ready to go.

Thank you very much.

Sure.

Our next question will come from the site of Stuart Bush from RBC Capital Markets.

Go ahead.

Yes, hi.

Good morning.

Good morning, Stuart.

I was hoping you could walk us through again the timeline for after -- how long after Project 100 makes its selection to how long we should expect it to take to negotiate with the utilities, and so then, how long after that we would expect to see any revenue from the projects?

The schedule as we understand it is, the Clean Energy Fund will make selections on the 26th of March.

There will be some kind of a public announcement, probably around the first week of April.

It takes probably another 30 days to get through the discussions with the utilities, and there's probably another 30 days for PUC approval.

So that puts us into, probably, the late June timeframe for an actual award, at which point, we would be off ramping up the business.

And depending on which projects get selected, we would start to see down payments starting to flow for equipment orders probably in the July timeframe.

And then you would get the bulk of the revenue when it ships, is that right?

No, we would structure most of these so that we would get progress payments.

We want to make sure that we are managing working capital as we ramp up.

So for a typical project, our payment terms would be 10% down, 40% on material, another 40% when we ship.

Joe, anything you want to add to that?

Yes.

And Stuart, from a revenue recognition standpoint, we would -- we're under percentage of completion, so delivery cycle on these projects would be somewhere between 9 and 15 months.

Really depends on how many orders we get.

And we would be taking that over that cycle, is how the revenue would be recognized.

Okay.

So, I guess, along those lines, how -- what is your best guess on guidance for your cash needs for '07, for fiscal '07 at this point?

I mean, you obviously have some sort of internal targets that you're assuming from Project 100, along with all your other backlog.

So, what would be your best guess for cash needs for this year?

Well, let me take that a little differently, Stuart, because we're really not in the business of guessing.

But in any event, the -- our cash flow right now is targeted to be very similar to our cash flow last year.

The question you're asking is, what happens if we get a Connecticut 100 Project?

Right.

Let's take -- let's say 20 megawatts.

So 20 megawatts, all the cost into the 20 megawatts would be about, say, $80 million.

The $80 million is the cash requirement.

We would expect, depending on, there's a couple of paths how you would fund that.

We have one scenario where we have our developers, will basically buy product from us.

So we are a product supplier, they will buy product.

The payment terms, as Dan was describing, will be somewhat our standard payment terms.

So, again, 10, 40, 40, 10, or something to that extent.

So we would get a significant amount of cash in the upfront periods in order to build out the inventory and then get the remainder of the cash at the time.

So in that scenario, you would have 50% of the cash, certainly wouldn't be -- so, if you have $80 million times 50%, is obviously $40 million.

That all wouldn't hit you over one point in time, but over the life of that project, you would have some kind of a working capital path that would be that kind of a number.

Now in, that scenario, what we would expect to do, we've got a good customer, which would be the state of Connecticut, is that we would, in effect, be able to borrow against that, which really mitigate that cash flow.

So we're not looking at a huge cash flow from an equity standpoint, for example, a huge cash flow drain.

The other scenario is that we get -- we win a project where we would be responsible for finding project finance.

And in that case, what we would expect is we would get construction to build financing, and then the takeout would be with the project finance company.

So, again, we wouldn't see a significant drain on cash flow.

Does that answer your question?

Yeah.

No, that's very helpful, I think.

One last question, and it sort of shifts more to your comments about the technology improvements that you're targeting.

Yeah.

Can you give me some color on this 15% additional power increase that you're targeting?

Does that involve tech changes to the stack or to the balance of plant?

And maybe just give me any better color on what you guys are doing there that you can?

Yes.

One of the things that's really unique about our technology versus other fuel cell technologies like phosphoric acid or PEM is, we're, really, nowhere near the theoretical limit of what you can do with a carbonate stack.

So, what we have been doing in our R&D efforts is looking at, how do we improve the core technology to be able to take and draw more current from a stack.

If you draw more current from a stack, you make more heat.

So, a lot of it comes down to, how do we manage heat better.

So, what we have been doing is coming up with some changes to the core fuel cell design that will allow us to produce more power from an individual cell.

The changes to the balance of plant really aren't significant in terms of their impact on power output.

Our efforts there really are focused more on cost reductions.

We're continuing to improve that core technology, and that's what we've been testing and what we call subscale stack.

It's basically full-size cells but only at 10 kilowatt in height for the stack.

And we're pretty pleased with the results we see there.

I guess that leads me to a last question, then.

How close are we to -- can you put any numbers around how close with are to whatever theoretical limits there are on stack efficiency?

In terms of what we can do in terms of the output of the stack, we're probably, I would say about 75% of theoretical.

Okay.

Great.

Thanks a lot, guys.

Sure thing.

We'll take our next question from the site of Walter Nasdeo from Ardour Capital.

Go ahead.

Thank you.

Good morning.

Good morning, Walter.

Just briefly, can you give me a quick update on the status of the microturbine fuel cell hybrid, how that's coming along?

Yes, we actually -- we shipped that unit to Montana where it's been running very well.

The demonstration phase up there is over.

What we're finding is there's some significant interest in Japan to take that unit and ship it over there at a major player in the Japanese market.

So we're in the process of working out what that demonstration will look like in Japan.

So we'll likely bring that unit back here, make sure it's current in terms of anything we've seen from its operation, and then ship the same thing off to Japan to do a demonstration over there.

Because what we see in the Japanese market is, they are so driven by efficiency, that there's tremendous pent up interest in seeing this product operate over there.

So we said to make sure that we continue to stimulate that.

Okay.

What size fuel cell are you using with what size microturbine right now?

What we've been doing for our demonstration project is one of our 250 kilowatt units with a Capstone 60-kilowatt microturbine.

Right, right.

How -- do you envision being able to continually step that up in size on both -- using multiple microturbines with a larger fuel cell going forward?

Yes.

In fact, if you really get out of the microturbine size and get to a more industrial class gas turbine, the performance takes a pretty significant leap in terms of kind of efficiencies we can achieve.

We demonstrated at the customer site, with our demonstration unit, 56% efficiency.

But we've been doing some work with some of the major turbine players, and we can pretty easily break the 62% efficiency level with using a more commonly available gas turbine design.

Interesting, okay.

And I just want to jump over to the sales side for a brief second.

Can you -- I know that right now it's kind of hit or miss and you're going after contracts and things like that.

But can you give some sort of detail on what the sales cycle is shaping up to be, and what you are looking at doing as far as a sales force goes going forward?

If we look at where our orders are coming from right now, right now most of our order flow's going to be coming from California.

What the team that we've got out there has done is, they have built a really strong pipeline of projects that we're starting to see those orders get announced.

That cycle is probably still about a year.

When you identify the customer, get through the whole process of getting incentive letters approved by the state, and so forth.

We expect to see, probably, 10 megawatts out of the California market this fiscal year.

The market that we see ramping up quickly, here, is Korea.

Korea's built a team that really doesn't require a lot of our direct sales support.

They have got pretty capable people on their own.

We've seen the first order from them, and we expect to see more megawatts come from them this fiscal year.

And then Connecticut, of course, we expect to see some significant megawatts there.

From our own sales force, what we're going to see, probably, is the need for some more people in California, because we're bringing more partners on there.

All the macrodrivers are right to continue to grow the business there.

Then we'll see what level of support we need in the other markets, like Korea.

Okay.

What do you look for in a salesperson?

Do you want somebody with a highly technical background, or do you want a guy that just comes kind of out of the industrial machine group?

We really want somebody that understands energy business a little bit, but really has more of a development slant, the ability to go out and development projects, meet with a customer, understand what their needs are, and craft a project that solves some of their issues.

They don't really have to be an expert in fuel cells or even power general equipment, per se.

Okay.

Thank you very much, guys.

Sure thing.

We'll take our next question from the site of Jeff Osborne from CIBC World Markets.

Go ahead.

Good morning.

Just a few quick questions.

I was wondering if we could just drill into the R&D gross margin line a little bit.

I know revenue was a little bit softer this quarter.

You mentioned with the solid oxide to coal gas program transition.

Just looking forward, should we continue to look at that kind of mid teens gross margin once that transition's done?

The -- on the R&D contract line, the margin, the cost ratio there's about 1 to 1.

That pretty much should be the track, should be the track on the R&D contract revenue.

We should see some growth, because our backlog is significantly higher than it has been in the past with the SECA contract, once we get that transitioned over and moving forward.

Great.

And then, just the last question.

On the inventory side, obviously, a substantial ramp here.

Just, are you done with the ramp, or should we be modeling quite a bit of working capital use in the March quarter, as well, as you gear up for some of those July contracts for the Project 100?

Yes.

I think, for the moment, I think we're done with the ramp.

What we've done to the inventory is we -- you wait forever for the regulatory cycle close.

You have to make some bets.

We've increased our DFC1500 inventory.

That inventory will go to megawatt-size jobs, clearly, the Korean 2.4-megawatt is two of those.

So that will come in and come out, and that will be somewhat of a normal working capital working cycle.

We've also spent some money on DFC3000.

That is looking for a home.

That home should be Connecticut, or it can be Korea.

We're expecting -- or even, there's actually some opportunities in California for that, so we're expecting that to come out.

But we are advancing our process.

Then long lead components is, we're just getting prepared so that we can reduce that total buildout, delivery cycle when these orders come through.

So the inventory should be pretty stable at this point.

When Connecticut 100 comes, depending on the size of the inventory, the size of the orders will determine what the working capital impact would be.

But for the moment, you're kind of geared up for that 10 to 20 megawatts -- from Project 100?

Yes.

We're gearing for that at this juncture, so, probably, on the low end of that.

We're probably gearing for the 10, and then if it's bigger than that, you'll see more impact.

Very good.

Just with all of the moving parts, here, and the better visibility, can you just provide an update as to CapEx for 2007?

I know you mentioned a similar cash burn, but just in particular on the CapEx line, that would be appreciated.

Yes.

CapEx is, as Dan was saying before, we're not expecting -- we have 50 megawatts of capacity in our Torrington plant.

We'll probably, depending on the amount of orders we get, we will get -- we will look at maybe some process changes, which would be some new capital up there.

But not significant capital, probably not dissimilar than -- we have about a depreciation-type maintenance run rate on Cap, which is about $5 million, somewhere in that range.

I think the big trigger here is, depending on how the order flow comes and the multi-megawatt orders come, is our decision-making point as to going to 150 megawatts of capacity.

That's a cycle.

That's going take us 12 to 18 months to complete, and with some decent indication of sustainable order flow, I think that's the CapEx decision that we'll make.

And just to finish that thought, the CapEx requirement to go to 150 is, we're not really a capital-intensive company.

We're really building about 50% of the product.

The rest of the product we're buying, the mechanical piece, the electronics piece, piping is all purchased from the outside.

So in that vein, we're looking at somewhere between a $25 million, $35 million capital cost to expand to $150 million.

That's kind of a picture of what we're thinking with capital.

Very good.

Thank you for the update.

Our next question comes from the site of David Snow from Energy Equities.

Go ahead.

Yes, hi.

I'm wondering if you could give us some color on the POSCO joint venture as compared to the two that you've done in the past with Japan and in Germany in which, I believe, if I recall, you got the margin on the fuel cell island and they got the margin on the balance of plant.

I'm not sure if that's correct in the past ones.

If you could kind of compare and contrast the current one versus those.

Sure.

If you look at what we did in Europe, with MTU, MTU's a little different.

They actually are a licensee of our technology.

They buy fuel cell components that we manufacture.

They make their own stack, their own fuel cell module using our components, and then build their balance of plant in country.

If you look at what we did with Marubeni in Japan, they never actually went to the OEM stage.

Marubeni, while they've been doing a good job with developing the market there, don't really have that capability themselves, which is part of why we've been looking for that Asian partner that can actually start to produce product with us in Asia.

So what POSCO will be doing is focusing primarily on the balance of plant.

They will buy a complete fuel cell module from us.

We'll make the fuel cell components, make the stack, take it through some testing, and then ship that conditioned and tested stack that they will incorporate into their balance of plant.

What the agreement also allows is for us to be buying balance of plant from them.

So it really becomes part of our cost reduction, where you basically can source the components, subsystems, and build that balance of plant in a labor market that's half of what it is here in the U.S.

So it really presents some opportunities for some pretty significant cost savings on the balance of plant.

You would use that balance of plant in the U.S. market?

Yes.

Really?

You would take stuff from -- heavy stuff from over there and ship it over here and still save a lot of money, I guess?

Yes.

Actually, if you look at what we do now, there are components that we buy from Asia that get incorporated into what we're building over here.

So we've already done a little bit of sourcing over there.

But if you think about it from a savings standpoint, the big impact over there is labor.

The balance of plant, unlike our fuel cell stack, is about half labor.

So if you're going to a labor market that's half of what it is here in the U.S., and the components that you're buying also that go into that are also made in that region of the world, there's some pretty significant potential savings that would overwhelm any cost of shipping it back to the U.S. for the completed balance.

So you're going to get the total -- you'll get a bigger yield per order, or per megawatt, than was the case with MTU, where you were just getting license revenues and they were getting a lot of the manufacturing profits.

And I would think that you'll make the full profit on the fuel cell component and, in addition, you will get some savings, some significant benefits on the balance of plant.

As well as pretty significant royalty on the balance of plant that they'll make.

Oh, royalty, too, on the balance?

Yes.

Okay.

Favorable deal for us.

We're pretty excited about it.

And so, this will give you net-net about the same margin or gross profit per megawatt as you would have on the U.S. order?

Probably better.

Better.

Yes.

We see better pricing there because of the inventive program.

The value that we're going capture is really on our core technology, which is really where we want the business to go in the long run anyway, and the royalty stream as well.

So it's -- all the pieces go in the right direction for Korea.

Great.

Thank you.

And will they be selling to Japan as well, do you think, or Asia in general, or just to Korea?

Well, they are going to start with Korea, but we've really identified them as our Asian OEM.

So, Marubeni was actually part of the discussions at one point in time, and they look at them as potentially being a supplier for the completed product over there.

So we would expect, after they show some significant success in Korea, that we would start to broaden what we can do with the products that they are going to be making.

Terrific.

Thank you very much.

Sure.

We'll take our next question from the site of John Adams from Canaccord Adams.

Go ahead, please.

Good morning, people.

Good morning, John.

Easy question for you.

The POSCO order, how come it was two DFC1500s rather than one DFC3000?

Actually, we had a lot of discussion back and forth on that.

And we look at the marketplace over there, they see a need for both of those.

And what they really wanted to do was to make sure that the first one they had, they got on the ground at fast as possible, and us already having a 1500 we had been building in through inventory, they saw that as the fastest chance to get hardware on the ground.

We'll see them order 3000s going forward.

Great.

Thank you.

Sure.

[OPERATOR INSTRUCTIONS]

We'll take our next question from the site of Pearce Hammond from Simmons & Company.

Go ahead.

Yes, just a follow-up.

Any update on the Enbridge gas letdown stations?

They have actually been doing work on the site.

They have got piping and everything else they have been laying.

The turbo expander that goes with that has been ordered.

And I think the Enbridge team is actually down at the manufacturer this week evaluating how the turbo expander is coming together.

So they are making some pretty good progress there for their site in Toronto.

And when do you see the potential there sort of materializing, next year, the year after?

Well, they actually bid with us in Project 100 for pretty substantial sized projects, so they are already off developing sites elsewhere.

Great.

And then, just housekeeping.

How many megawatts were shipped during the quarter, and what's the backlog in megawatts right now?

Yes, hang on one second.

The shipment in the quarter was one unit; it was a 250-kilowatt unit to Japan.

And then I'm tracking -- at the end of the quarter, the backlog was 9.3, and the backlog through today is 10.45.

Thank you very much.

Okay.

[OPERATOR INSTRUCTIONS]

We'll take our last question from the site of Larry [Pomerich] from Oppenheimer and Company.

Go ahead.

Good morning.

Good morning.

I'm just curious about two things.

Number one, the MTU order you got in the last quarter, does that imply anything about their intentions, about staying with you now that they are owned by the Swedes?

What we understand with their new owner, they are still tasked with off developing the market, and the order that they placed is for stacks that we're going to be delivering through the end of the fiscal year.

So, it looks like they are pretty much engaged in continuing to develop the market.

And it looks like they have been empowered go develop new projects and keep ordering equipment from us.

So, so far, all indications are positive.

We're going to be meeting with their new senior management here in a couple of weeks, so, hopefully, we'll have a little better insight into what their plans are by the end of the month.

Thank you.

And also, have you made any progress on packaging your power purchase agreements, the sale?

Yes.

We're, Larry, we have -- we're actually currently operating in California with a couple of financing players where we've created a pooling concept in that market.

Because of the consistency of their subsidy program and the economics and with the investment tax credit on that, we have a couple of very interested players, and we're trying to develop projects that way.

So we're looking right now for new projects, and then, there is a possibility that we could take the -- similar to what we did with Sierra Nevada where we sold off that PPA, is get these, maybe, transferred in under these financing pooling concepts.

So we've actually gotten very encouraging response to that.

And last, whatever happened to Caterpillar?

Caterpillar, actually, was one of the companies that we bid with for Project 100.

So they are actually now out developing some of the larger megawatt-class products.

I think what they discovered probably more than anything else was, that they came into the OEM piece thinking they were going to be able to take cost out very quickly, and they found out that we could take cost out a lot quicker than they could.

Just like if we were going to go try and cost reduce an engine, we don't really have that expertise.

So what they really focus their efforts on now are more of the market development activities.

We'll see them probably come back to the OEM piece when we're a little bit further down the cost path.

But they participate in a pretty significant sized project for Project 100, so we were happy to see that.

Thank you.

Okay, thank you.

I think that was the end of the calls we have on the list.

I want to thank everybody for joining us today, and we'll keep you appraised of our progress going forward.

That does conclude today's teleconference.

You may disconnect at any time.

Thank you, and have a great day.