燃料電池能源 (FCEL) 2007 Q3 法說會逐字稿

Good day and welcome, everyone, to today's FuelCell Energy reports Q3 2007 results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. R. Daniel Brdar. Please go ahead, sir.

Thank you very much, everyone, and good morning. Welcome to FuelCell Energy's fourth-quarter conference call. Our financial results for the quarter clearly reflect our strategy to drive down our product costs, grow our presence in key markets, and move our business to megawatt and multimegawatt installations. Our success in executing these elements of our strategy is essential to allow us to cost-effectively achieve the volume necessary to become profitable.

Looking at this quarter, FuelCell Energy's product sales were up 45% over the prior year. The product backlog more than doubled and the product cost ratio improved by over 30% compared to this time last year. We are increasingly capturing orders in our key markets, such as the 5.1 megawatt order from POSCO announced during the quarter and the 1.2 megawatt order announced this week from California.

Our rapidly growing sales pipeline in Korea and California coupled with progress in advancing the Connecticut Project 100 projects is evidence of the growing demand for high-efficiency, 24/7 reliable, ultra-clean power. The current backlog in sales pipeline is increasingly made up of our megawatt-class products. This is an important part of our approach to the market, since they are our lowest unit cost products and we are the only company offering commercial megawatt-class fuel cells.

I mentioned in last quarter's conference call that our visibility to increasing order flow from California and Asia warranted a production ramp up in our manufacturing plant in Torrington, Connecticut. The first step of that ramp is well under way.

We will talk more about our progress in our key markets, production ramping, and cost reduction later, but first I want to turn the call over to Joe Mahler, our Chief Financial Officer, to review the financial results for the quarter.

Thank you, Dan, and good morning, everyone. I am pleased to report Company progress on a number of key financial indicators, including increasing revenues and improving margins.

Total revenues for the third quarter were $13.5 million, compared to $8.7 million in the third quarter of 2006. Product sales and revenues were $7.8 million, compared to $5.4 million. Research and development contract revenue was $5.7 million, compared to $3.3 million.

Our backlog is growing and in total is $71 million, compared to $30 million a year ago. Product revenue backlog including long-term service agreements increased to $49.6 million, compared to $20 million reported at July 31, 2006. R&D backlog at July 31, 2007, increased to $22.1 million, up from $9.8 million a year ago mostly due to our solid oxide fuel cell program.

The net loss to common shareholders for the third quarter improved and was $16.2 million or $0.24 per basic and diluted share, compared to a net loss to common shareholders of $19.8 million or $0.37 per basic and diluted share.

The theme in the quarter is that we are realizing improving margins on higher revenue. We have been able to lower costs across all three products. Further, we have been able to shift sales mix to megawatt-class products, which had better margins than submegawatt products.

The product cost margin for the quarter was 1.91 to 1, as compared to 2.83 in the year-ago period. As most of our more of our DFC3000 2.4 megawatt products are sold, these margins will continue to move closer to 1 to 1. The year-to-date numbers confirm the same pattern.

For the nine months ended July 31, we reported revenue of $31.8 million, compared to $24.2 million a year ago. Product sales and revenues were $21.6 million compared to $14.9 million. The product cost to revenue ratio improved to 2.07 compared with 2.71 on declining product costs.

Total cash and investments were 165 -- I'm sorry, $167.5 million as of July 31. Third-quarter net cash use was $11.2 million compared to $17 million used in the third quarter of 2006. Cash deposits related to new orders benefited the quarter and were offset by increased inventory. Capital spending totaled approximately $800,000 and depreciation expense for the quarter was approximately $2.3 million.

To close, this was a solid quarter and we are in strong financial condition as we prepare for growth. Dan?

Thanks, Joe. Six months ago, we signed a ten-year manufacturing and distribution agreement with POSCO Power. In the third quarter, our partner POSCO Power placed 5.1 megawatts of orders for the Korea market, mostly from megawatt-class products including our flagship 2.4 megawatt DFC3000. This brings their total orders for the year to 7.9 megawatts, a strong start to our relationship.

In addition to strong megawatt-class order flow, POSCO is forming the strategic relationships necessary to rapidly grow the Korean market. An example is the partnership announced last week with KEPCO. KEPCO is the dominant utility in South Korea and supplies 95% of the country's electricity.

The partnership will enable POSCO to reach KEPCO's customers and its electric generation subsidiaries. This is particularly important since the incentive program in Korea requires the power generated from fuel cell power plants to be sold to utilities.

FuelCell's products also meet utilities' need for megawatt-class 24/7 clean, reliable power that is being driven by renewable portfolio standard mandates like Korea's new and renewable energy standard. The goal of Korea's RPS program is 3000 megawatts of power by 2010.

While their RPS goal is only 5% of Korea's installed capacity, there is a growing recognition that their goal cannot be achieved through the use of wind and solar power. Ultra-clean fuel cells are essential to meet their clean energy targets.

In fact, because POSCO expects the fuel cell market to be sizable, it is building its own balance of plant manufacturing facility capable of producing 50 megawatts per year by the end of 2008, moving to 100 megawatts per year by the end of 2010. The official groundbreaking ceremony for the facility is planned for early October.

In preparation for making their own balance of plant, earlier this month, POSCO ordered a 300 kilowatt fuel cell module and balance of plant components from FuelCell Energy. We continue to be impressed with the capabilities of our new partner in Asia and their aggressive steps to develop and capture market share.

California has also been a strong market for us. We now have 14 megawatts installed or in backlog, with wastewater treatment printing to be a particularly strong market segment. Yesterday, we announced a 1.2 megawatt order from the Turlock Irrigation District in California for a DFC1500 which will use renewable biogas to produce enough ultra-clean power for 1000 homes and save thousands of times of carbon dioxide. This brings our wastewater treatment total in California to 5.85 megawatts.

These facilities need reliable, 24/7 power and can use the waste heat from the fuel cell for their operations. In addition, our high efficiency means they can make more kilowatt hours of electricity from the same amount of biogas compared to conventional sources of generation like engines or turbines.

There are over 360 wastewater treatment facilities in California, many with anaerobic digesters that produce a waste biogas that makes an excellent fuel for our products. The food and beverage processors and other wastewater producers represent even more opportunities.

With their renewable portfolio standard of 9000 megawatts by 2010, the potential for business in California is excellent, especially now that many regulators and utilities are reaching the same conclusion as the Korea market. They cannot meet their RPS goals with wind and solar or alone. Megawatt-class 24/7 clean solutions need to be addressed and added to our power capacity. Fuel cells meet that need.

In order to enhance our ability to do more multimegawatt business in California, we filed a petition with the California public utility commission to allow the incentives from the self-generation incentive program to be applied to projects up to 3 megawatts instead of the current project incentive cap of 1 megawatt. Both Southern California Edison and Pacific Gas & Electric filed letters in support of our requests to raise the allowable product incentive cap to 3 megawatts.

So far this fiscal year, we have sold 13.6 megawatts and by the end of our fiscal year in October, we expect to close several more orders. Speaking of which, this morning we announced that Ford Motor Company ordered a 300 kilowatt DFC300MA system.

This DFC system will use automotive plant paint solvent as fuel for our fuel cells, thus eliminating thousands of tons of nitrates and sulfur oxide as well as the significantly reducing CO2 from the exhaust. It is a great application of our products and one that is adaptable to many manufacturing operations that produce toxic byproducts.

In response to orders and anticipated business from California and Asia, we are in the process of ramping our production from 11 megawatts a year to 25 megawatts per year. This phase of our ramp will be completed by the end of the year. We will increase the ramp beyond that point depending on the orders from Connecticut's Project 100 and the near-term order closure rate for Asia and California.

As part of the current ramp, we took steps to hire a third shift in our Torrington plant and we are managing the integration process, phasing in a few people at a time, to minimize the disruption to operations. This has worked well. Production quality has remained high, while output is increasing.

Also since the growth in our orders and sales pipeline is predominately megawatt-class products, we are ordering additional equipment for megawatt-class testing and conditioning at a cost of $10 million to $15 million. The next step in our production ramp beyond the 25 megawatt per year level requires additional production personnel but only nominal capital until we reach 60 megawatts per year.

The outcome of the near-term opportunities in Connecticut, Korea and California will dictate the next level of our capacity ramp. We can increase the physical capacity of the Torrington facility to approximately 150 megawatts per year for $30 million to $40 million. We will keep you apprised of our ramping plans as these major orders are realized.

Speaking of Connecticut, August was an exciting month here in our home state. As many of you know, this past March the Connecticut Clean Energy Fund selected 68 megawatts of clean energy projects for its Project 100 that use our 2.4 megawatt DFC3000 power plant. Since then, the state's utilities have been evaluating these projects to determine which ones should move forward by for review by the Connecticut Department of Public Utility Control.

Last week, the utilities, Connecticut Light and Power and United Illuminating, submitted all 68 megawatts of our projects representing $200 million in potential sales to the DPUC. This is a major step forward in the process of converting these projects selections into orders.

Now that the projects are under DPUC review, the participants will receive a project-specific question within the next two weeks. Responses to DPUC questions are due by September 24. Any prefiled testimony from project applicants is due by mid-October and public hearings are planned for October 29 to 31.

Following receipt and review of any supplemental information, the DPUC will issue a draft decision in early December, followed by a final decision on December 19. After the DPUC gives its go-ahead for the winning projects, the project developers will negotiate the last few details of their PPAs. Based on our success in the bidding and review process to date, we are optimistic about the outcome and look forward to reporting back you shortly after the final DPUC decision.

The Connecticut story is not only about Project 100. Pepperidge Farm ordered a 1.2 megawatt DFC1500 in early August, to it to its existing DFC300, clearly demonstrating its satisfaction with our products and services. Once the unit is installed, Pepperidge Farm will be powering about 70% of its operations with our DFC power plants.

Turning to our cost-out efforts, our product cost ratio for the quarter again confirms the success of our efforts to drive down our product costs. Last year, we delivered an almost 40% reduction in the cost of our 2.4 megawatt DFC3000 in preparation for the multimegawatt opportunities we have just discussed.

This year, our focus returned to the 300 kilowatt and 1.2 megawatt products. Based on our most recent review, we are on target to achieve another 20% cost reduction for our DFC300 and DFC1500. Our efforts this year include continued value engineering, manufacturing efficiencies, and technology improvement.

Also with growing orders backlog, we are able to begin realizing cost reductions through the ability to purchasing in increased volume and also begin a global sourcing initiative for additional supply chain cost reductions. We will keep you apprised of our progress as we delivered the next round of cost reductions.

Looking briefly and at the macro situation, North Carolina, Illinois, New Hampshire, and Oregon recently adopted RPS mandates, so we are now up to 25 states with RPS programs from 21 at the beginning of the year. States like Delaware and Missouri are increasing their programs, so the momentum for ultra-clean and renewable power continues to increase.

At the federal level, both the House and Senate passed bills with an eight-year extension for the investment tax credit that covers fuel cells. In addition, the House bill increases the credit to $3000 a kilowatt and the Senate bill has a 40% credit. The differences in the House and Senate bills will be reconciled this fall, but both bills exhibit strong support for our industry.

With the growing interest we see from customers and increasing support on the state and federal level, the fuel cell industry is positioned for growth for those with commercial products to offer. It is similar in many ways to what happened to the solar industry. Ten years ago, the installed base of solar capacity was about 250 megawatts. In 2007, it is over 3 gigawatts, an incredible 28% growth rate worldwide due to industry support from public policy and strong incentives in just a limited number of places, California, Japan, and Germany.

For fuel cells, we expect to see a similar pattern emerge and open up large markets for our products. Fuel cells are the only 24/7 option. We provide a wide range of distributed generation, ultra-clean power levels for a broad customer base with minimal emissions. A recent report from The Freedonia Group estimates worldwide fuel cell markets to be at $8.5 billion by 2016. A report by Clean Edge estimates it will be twice that.

In the near term, our focuses on closing megawatt and multimegawatt sales in California, Connecticut, and Asia; ramping our production to meet the growing demand; and continuing to drive down our product costs through value engineering, technology improvements, and now due to increased order flow, volume purchasing, and global sourcing.

At this point, I would like to open up to call to questions from our listeners.

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) Sanjay Shrestha, Lazard Capital Markets.

Good morning, guys. It is actually Graham in for Sanjay. A couple quick questions. For the ramp in production, you said that is going to be up to 25 megawatts. Is that by the end of the year, fiscal year or the calendar year?

It will be by the end of December, end of the calendar year.

Then, in terms of -- so most of it is really you are adding outside about $10 million to $15 million, it is mostly variable costs that you are adding in there?

That is correct.

All right, great. Then turning to Connecticut 100 Project, you are now up to 150. If it is 150, your 68 megawatts are in there. What could potentially go wrong so that they would not turn into orders for you?

Boy, it is really crystal ball time here. From what we are seeing so far, we have got a lot of support for this program in general. What we could find are challenges with some of the projects that are not the fuel cell projects. We know there's some issues with some of the fuel supply for them.

There may be some challenges in terms of some of our partners getting their financing closing time for some of the projects. But right now we do not see a lot of risk. Most of that would have surfaced already. The utilities did a pretty thorough review of the projects. This is part of what it took quite a while to get it over to the DPUC.

But we are pretty pleased with the level of questions that we have gotten, how thorough they are looking at these things, and the level of due diligence that is going on. So we remain pretty optimistic about what the outcome is going to be.

But if they need to have 150 megawatts, you know, are there potentially other projects that could come in or would it be they would have to layer on to what is already there to meet that 150 megawatt goal?

Well, to meet the 150 megawatt goal, all they can go with is what has been submitted to-date. They can't add any more on it until they do a next round of solicitations.

All right, so that would be in a year or so --?

No, actually it is going to be much sooner than that. They are looking to try to get the solicitation put together in October.

Got it, okay. Then just one other quick question on the cost ratio. I guess it is off just a little bit sequentially. Is that just product timing on shipments there?

Yes, I think it is really -- that margin is very small. Mrs. Joe Mahler. So we are not viewing it as anything different than the -- I think last quarter, what were we? 185?

Right.

Last quarter, 191. It is right in the range.

Right, so really it is nothing.

Probably a little product mix, slight product mix differential. But it is basically the same exact theme.

Right, the trends kept going the right way.

Yes.

Then just turning to international markets, outside of Korea what are some other key international markets where you think you could start to see some traction?

One of the things that we heard from our partner, POSCO, who was here this week was they see other markets in Asia that they want to start exploring once they get a little bit more hardware on the ground in Korea.

So they see markets like Malaysia and Indonesia, potentially the Philippines that are areas that they want to start to explore. We think Europe is also going to start to open up for us, because what has happened is our partner over there had been a little bit in a stalemate as they went through a sale of their parent company. The transaction is now completed, so we are starting to see them become more active in the marketplace.

We are seeing more political activity as many of these countries are reaching the same kind of conclusions that you need something that is a baseload component in addition to wind and solar power. So we are seeing increased activity in Europe as well. So I think in general, the trends are all kind of going the same direction.

All right, great. Sounds very good. I will jump back in queue. Thanks very much, guys.

Walter Nasdeo, Ardour Capital Investments.

Good morning. I have a couple of quick questions. If it is possible to get a little bit of clarity on the cost-out program and maybe some concrete steps that you are doing, because obviously it has been very aggressive. Basically it has been pretty aggressive since Dan has been there. So what are some of the things that you are doing now? Then what is your expectation going forward over the course of the next few quarters as to how much more you can squeeze out?

Well, what we basically do is for each year we target the projects -- the product that we are going to work on. This year, we targeted the 300 kilowatt and the 1.2 megawatt. We are doing some additional value engineering that is bringing over some of the lessons that we learned from last year's efforts on the 2.4 megawatt product.

We are starting to do some global sourcing. We are working with our partner, POSCO, looking at them as a potential source of BOP supply for us, also looking at some offshore supply for some of the materials that we use since we now have enough volume to start buying things like vessels, commodity-type products like insulation, from sources offshore.

And continue our technology development, one on the things that we did not talk about in the script because we have not graduated yet is we have our next uprate ready to go on its next set of testing here. So we will be flowing another uprate in the future to the product line as well. So it's really a combination of several things coming together.

In terms of looking forward, our plan is just to continue driving the cost down. We have got a project product that is early in its lifecycle. As you go through cycles of cost reduction, you start to include more and more things that meet your targets but there is still plenty of ability to drive the cost of the product down.

Now with the ability to start getting some volume, it really starts to open up some other options that we didn't have before in terms of some strategic supply relationships and the ability to actually start sourcing things in locations that just economically would not make sense small volume.

I see. What -- as far as technology development goes, what areas are you finding are the most -- the lowest-hanging fruit as far as technology development? Is it in stack? Is it in membrane? Is it in balance of plant as far as power electronics and things like that go?

On the balance of plant, most of what we are doing is really just engineering. It is not really technology-focused. The technology aspects really relate to the stack itself, and those really fall into three categories.

One, our material substitutions to go from the materials we use to lower-cost alternatives. Those are tied closely to the other two technical objectives, which is increasing the power output from the stack and extending the stack life itself.

I see, okay. Just real briefly, what is the time period that you are expected to monetize the backlog?

Generally, Walter, that would be over the next, if I think about that, pretty much the next 12 months we are trying to monetize that. Are you talking the megawatt backlog or the dollar backlog?

The dollar backlog.

Yes, the dollar backlog actually has a component of service revenue. Service backlog is about $12 million. That will go over a longer period. So the amount that should monetize over the next period, that would be about the -- if the total commercial backlog is about $49 million, it would be about $35ish million, $33 million to $37 million, somewhere in that range.

Over the next 12 months?

Yes, I would think.

Very good. Thank you, men.

Pearce Hammond, Simmons & Company International.

Yes, good morning. The R&D jumped up this quarter. How should we think about that moving forward as sort of a run rate?

Yes, I think what we have been describing -- this is Joe Mahler again -- what we have been describing is that when the SECA contract converted from the smaller auxiliary power unit, small gas unit structure to the large coal program, it took a little bit of time to convert that. So what this is in this quarter is a catch-up to a large degree.

I think what you will see from this point on is that will start to come down, back down again, not necessarily to second-quarter levels but in a higher range. But it will start to moderate. So this is really a peak. This would be a peak number for that at this point. I am looking over the next 12 months that that number should be somewhere between $12 million and $15 million is the government number.

Okay, great. Thank you. Then, Dan, in your prepared remarks, you had mentioned I take think, $30 million to $40 million to take capacity to what level?

150 megawatts a year.

150 megawatts. And can you provide an update on the Enbridge venture?

Yes, actually, the unit that is going to be shipped to their facility in Toronto, the first DFC energy recovery device, that is actually going to ship here in the next week or two.

Enbridge was also involved in the Ford order that we announced this morning, and of course they were involved in the project that was the top-ranked project in Connecticut 100, our Milford ERG project. So they are pretty active in terms of both closing business and developing new opportunities for us, particularly leveraging their expertise and connections in the gas pipeline business.

Great, and then I thought this morning's release on the Ford plant was fairly intriguing. I mean, it sounds like that could be a potentially huge market because of all the different painting applications around the world.

It's not even just painting. Just there's a lot of manufacturing facilities that produce waste gases that actually would be good fuels for our fuel cells. So this is a pretty important application for the product, because you get a high-profile customer like Ford that is excited about the green initiatives that they are doing that want to show off the facility, and you get the ability to take other potential manufacturing customers to go see the installation.

So does this particular fuels cell installation in Ontario, does it have to go through maybe more of a testing phase because it is a new fuel for the fuel cell?

No, we did enough work on a whole variety of fuels that we can take the product as it exists today and apply it to their application. So it is actually pretty straightforward. It is done as purely a commercial sale.

Okay, so you expect the same sort of availability you would have on any other?

Yes, we do.

Thank you.

Stuart Bush, RBC Capital Markets.

Yes, hi. Good morning, guys. Joe, just real quick, you mentioned the product backlog included some service revenues. How many megawatts is represented in that product backlog?

The product backlog at July 31 was about 13.4 megawatts.

Great, and maybe you can give me some color on what is happening with the end market for hotels? I know Starwood had a couple of cells at some locations. Should we expect some follow-on orders there in that industry or how does that pipeline look there?

Yes, actually, the hotel market is an exciting market for us. I think as we have described in the past, the hotel market is looking for power purchase agreements. And so what we did is we -- most of the power purchase agreements we put onto our books at that time were the Starwood hotels at least on the West Coast.

So what we are doing is we are out trying to create financing avenues to actually capture that market. So if you go to Starwood Hotels, what they want to do is at any place that we can save them some money, they clearly have a strategy to go green and they have a strategy to get more reliable and a strategy to reduce costs. So we have that opportunity and we are actually working with project financing players to set up some pooling concepts.

What we think the triggers on that are going to be is that once we start getting the larger projects, whether we do it or our developers do it on Connecticut 100, then we think that market will absolutely enable. We think that that is actually a very good market for us.

Yes, so along those lines, just out of the 68 megawatts you had a Connecticut Project 100, how much of that is potentially financed or is done PPA in-house? And how much of that is -- is it all third-party?

Yes, right now, we are letting the developers take the lead on this and they are actively out pursuing structures. The real opportunity is that the investment tax credit makes these projects very appealing. They have good, solid returns, and they have -- and the models work well.

The structure that the Connecticut 100 has developed is a very project financeable structure, so you have got into Connecticut 100. You have got utilities. You have got long-term contracts. The investment tax credit adds to the returns. So right now we are letting the developers -- we have had significant conversations with project financing players and so we are letting them take the lead.

The one project that is still in our camp at this point would be the Bridgeport fuel cell project. That is the 14.4 megawatt, and that project can either be project financed, we believe, or it may end up in another pot with -- maybe in one of the other developer's pot as they do their financing. There's certainly economies of scale if you combine them. So we are actually exploring and we have had good receptions on pooling concepts even for that large amount of projects.

So would those project financings need to be in place by the December timeframe?

No, they do not have to be in place by that time frame. It is really --.

Receive an order and then get financing -- put the structure around it later?

Yes, I think a lot of this is happening simultaneously, so you are trying to drive the process to when you get to that point that you are pretty much have your ducks in line, right? So, I mean, everybody is driving to when are we going to get the order? And then is the financing on the table? So everybody is driving.

We have actually -- we have expected it actually earlier than December, so a lot of the wheels in motion are really set up to be able to close as the DPUC process comes to a head. It is really trying to tie it to the same timeline.

So I think it is all -- that all will come together. It is not we are going to wait until December 19 and then we are going to start our project financing effort, no. All of these wheels are in motion at this point.

Okay, I guess what I am trying to get to is can you assess the risk of you getting some of these orders and then you having to finance them in-house?

I think the risk is on the one project I described. I think the developers are in pretty good shape. I think there's significant tax appetite out there, tax equity appetite in the marketplace.

I think right now I am viewing the risk as our project only and I have got project financers who are actively engaged looking at structuring something for that project, and I have a think that a couple to add to that project, too. So --

Okay, and then just one last question. I was wondering, Dan, if you could get your view on the potential of Congress to pass a carbon cap and trade program and if you could walk us through how that might change the economics of the fuel cells.

It looks increasingly likely that particularly after we get through this next election cycle that there is going to be pressure to do something in terms some of something on CO2. I don't think it is going to be a tax, although I know there is a lot of desire for that in some of the Democratic firms. But cap and trade seems to be what is more likely just because they are already models that are out there and there seems the ability, a little bit broader support.

Depending on what form it takes and the valuation that gets applied to the CO2, it ultimately is going to help our economics. Numbers that we see, say that a ton of CO2 is going to go anywhere from $30 million -- or $30 a ton to $180 a ton. So it is a pretty wide range, but any of those ultimately flow down to our economics in a positive fashion because we are the most efficient source of generation in our size range.

So we put out less CO2 versus other choices. For example, our unit versus the average fossil fuel plant without heat recovery, we are about half the CO2 on a pounds per megawatt hour basis. What heat recovery, we are about a quarter of it. So there is a significant potential when it finally gets monetized.

We were kind of hoping that California would actually move to monetize their program a little quicker because we were hoping there would be a model for the federal government to follow, but my view is we are going to see something. It is just a question of how quickly it takes shape.

Okay, great. Just how many tons would that be per kilowatt sold, would you say, if you saved half?

Actually if you want, we can put the other couple of numbers for you and shoot them off to you after the call, if you would like.

Okay, yes, I am just trying to just get a general baseplate of how much of that could be valuable for you.

Yes, we can give you an idea of what the impact will be per megawatt for each fuel cell.

Okay, great. Thanks, guys.

Adam Hinckley, CIBC World Markets.

Hey guys. Thanks for taking my question. First, just a quick clarification. Dan, in your prepared remarks you said that you guys have sold 13.6 megawatts so far in 2007. I thought the past two quarters you had sold about 2.4 megawatts in the past two quarters. So am I missing something here? Is it sort of a classification issue that I am not understanding correctly?

If you look at second quarter, we had 4.5 megawatts. That included 1.2 megawatts -- I'm sorry, there was about 3.1 megawatts in California, 2.4 megawatts for POSCO.

So you are talking about orders?

Yes.

You are not talking about shipments?

We are talking about orders.

Okay, I thought I heard you say sales. Okay, my mistake. So then, how many megawatts were actually shipped this quarter?

Shipments this quarter, the third quarter, we had a 1.35 megawatts were shipped.

Okay, so now that you guys have been proceeding with your discussions with utilities on the Connecticut Project 100 and it seems that it is pretty far along and that they are pretty happy with the agreement at this point, is that $3000 per kilowatt number still pretty accurate to use for our modeling?

That is the basis of what has been approved in all the projects so far.

Okay, and now thinking about the timing for when all of that will be recognized, the 68 megawatts, it seems probably unlikely you are going to get anything until probably 2Q of fiscal '08 at this point. How long is it going to take for all of that to be sold off and recognized in revenue? Is it a year and a half? Is it up to two years? Can you give us some clarity on that?

Yes, it is probably going to take place over a two-year period and it is really a function on how much we actually see actually go to orders, because that will drive what level we ramp the business too. But two years is a good number to use in terms of how to model it.

Okay, and now how should we think about the product's cost ratio as you move from the 11 megawatts to 25 megawatts production?

Yes, this is Joe Mahler. As we go -- the key to the cost ratio is the product mix. So the product mix right now, if you are looking at putting costs through our financial statements, if you do 2 megawatt plants in volume, so if you get Connecticut -- we have a 2.4 megawatts in Korea and if you add Connecticut 2.4 is another 2.4 to that, that quickly goes to a 1 to 1 ratio. Then as you increase volumes, so with 25 megawatt run rate, you are below 1 to 1 on 2 megawatt plants.

The issue is going to be that currently your cost of a submegawatt is around $4800. Your cost of a megawatt plant is about $4300 a kilowatt. So when you are looking at the megawatt plant, that is kind of our average cost ratio, like 180, 150 to 180, in that range depending on pricing. So that will dictate how the cost ratio will move.

So the real key is getting less submegawatts, more 2 megawatts. That will drive it to -- so my expectation and I am not really guiding, but we are looking in that volume equation to put more 2 megawatt plants into the marketplace. So we are looking to keep driving the ratio lower.

Okay, and then also just can you comment on pricing in your non-Connecticut Project 100 markets? So is the pricing in Korea and California relative to Connecticut Project 100 better or sort of on the same level?

We see a pretty similar level in most of the markets. What has happened is as we got through the concerns about our gas prices and everything else, it has gotten a little bit more predictable. We have seen the pricing normalize across most of the market. So 3000 is pretty representative of all of the markets we are working in.

Okay, great. Thanks so much, guys.

John Adams, Canaccord Adams.

His question has been answered.

Okay, thank you.

Pavel Molchanov, Raymond James.

Hi, good morning. A question about the policy framework you guys are operating in. You have talked a lot about Korea, where the government has made fuel cells kind of a strategic energy priority. Do you see any other countries or any states that are specifically targeting fuel cells as part of their energy policy?

Well, what we see on the state level is a lot of attention to what is going on in Connecticut, because Connecticut seems to have a model that works. California is doing the same thing now. If you look at the discussions that we have been having with the California utilities, the California Public Utility Commissions, we are seen growing interest in doing something using our fuel cells because it is becoming like increasingly about efficiency, about CO2 and finding that with that firm baseload piece that matches with wind and solar.

So Connecticut and California and Korea are sort of the drivers, but like we have seen with most other environmental kinds of initiatives, all it takes is a couple of leaders and others tend to follow.

Okay, and any -- internationally anything like that?

Well, Korea has certainly got the rest of Asia's attention. We are starting to see increased interest in some of the other countries in Asia. That is why POSCO is now talking about going outside of Korea to places like Malaysia and Indonesia.

So I think everybody is looking at the new programs that are in place in these markets and watching them work, finding out whether they are good models, which so far I think everybody is pretty satisfied with. Then starting to change their own models to try to stimulate the adoption of clean energy.

All right, got it. Thanks very much.

Max Vichniakov, Canaccord Adams.

Good morning. I have just a couple questions on the Connecticut Project 100. Have you had much interaction with the utilities during your due diligence process? And if you could maybe provide any more information on the biomass project that appears not to make into the final process.

Well, the interaction we have had with the utilities has really been in response to the specific project questions that they have asked. Doing much interaction with them outside of that just really would not be appropriate during the course of the evaluation.

The biomass project, there's really -- there are two that appear to be competing for the same source of fuel. So we are waiting to see that sort itself out because there does not appear to be enough fuel for both of those projects.

There is a third project that is in Norwalk, where I think they also have issues with the availability of the biomass fuel that they intend to use. So I think those issues are going to sort themselves out here in the coming weeks. So there is likely to be significantly less projects finally get approved just because of the fuel supply issue for them.

Great, all right. Thank you, and my second question is on the overall cash usage in Q4, particularly for CapEx and working capital, if you could provide any expectations.

Yes, cash flow for us goes up and down I think over the course of the year. I think the first quarter with like $20 million and the second quarter was like $13 million. This quarter is $11 million. This quarter was -- we had a good quarter in the sense that we put some good orders in and we got some downpayments against that.

I think cash flow is generally in a range of around $15 million per quarter. That is really what we are targeting. Quarter-to-quarter you get a little ups and downs. So I would be looking in that range, that kind of a range going forward, $15 million, maybe a little ire higher.

Great, and regarding POSCO, are you expecting any more POSCO orders in the short/medium-term?

Yes, we are. Part of why they were here this week was to understand our ramping plans and our ability to respond to the growing demand they see.

Okay.

Can I just come back on the cash, that the one item that does enter into our thinking right now is that we are ramping the business. I think we talked about too we are going to build out physical capacity to 60 megawatts. We are increasing our megawatt production capacity and that is going to cost us somewhere in the $10 million to $14 million range. So you will see a little bit more ramping cash coming through on the numbers that I pushed out.

Okay, great. Thank you very much.

Ramesh Poola, Morningstar.

Good morning. I have a question on the Connecticut Clean Energy Fund. Originally, they have issued 100 megawatts worth of contract. Now it has went up to 150. That means they are going to issue a follow-up RFP?

If they do not have the full 150 ultimately go to complete projects, go through the PUC approval, which appears very likely at this point, they intend to have a next round of solicitations.

I see, so this means actually you have constantly looking forward to have some more RFPs in the future, something FuelCell is interested to be done?

Yes, there is the potential for us to actually capture more projects in the next round. Then the state as a whole has the continuing commitment to buy renewable energy, so we expect to be able to participate on an ongoing basis in terms of playing a role in the state's needs for clean energy.

I see. And how important it is actually this project in order to get leverage into other states because they have now 25 states have RPS? Do you think you can able to leverage Connecticut project to go to other states and bid for some other projects?

Yes, very much so. You know, in the discussions that we have had with some of the key states that we are looking to work with, like New York and Pennsylvania and others, they are very familiar with the Connecticut model. What we hear from the folks that we meet with is Connecticut seems to have a model that works. They have got a way to do competitive bidding.

They want to see the outcome of that process to make sure it has been tested and vetted in terms of a cost-effective way to supply the needs for each of the states' RPS programs. So we find that the other states that we are looking to work with are very keen on how this process works out because if there is a model that they can basically follow to get competitive bidding for renewable power, they want to try and adopt it.

Very good, thank you.

(OPERATOR INSTRUCTIONS)

Operator, I think we have reached the end up our list of folks that have questions to ask, so I would like to think everybody for joining us today. We appreciate you listening to our update on our progress and thank you for joining us. We look forward to talking to you next quarter.

Thank you. That does conclude today's conference. You may disconnect at this time.

Thank you.