燃料電池能源 (FCEL) 2007 Q4 法說會逐字稿

Good day and welcome to the FuelCell fourth quarter and fiscal year end 2007 earnings results conference call. Today's conference is being recorded. At this time I would like to turn things over to your moderator for today, Ms. Lisa Lettieri. Please go ahead.

Good morning everybody and welcome to FuelCell Energy's fourth quarter and year end results conference call. Delivering remarks today will be R. Daniel Brdar, Chairman and CEO, and Joseph Mahler our Senior VP and CFO.

Before proceeding with the call, I would like to remind everyone that this call is being recorded, and this presentation includes forward-looking statements including the company's plans and expectations for the continuing development and 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'll now turn the call over to Dan Brdar. Dan.

Thanks, Lisa. Good morning everyone, and thank you for joining us on FuelCell Energy's year end conference call. Today's call gives us a good opportunity to recap what has been a pivotal year for us, and to frame our expectations for 2008.

As you can see from our strong fourth quarter performance, demand for our products is growing significantly. We continue to be the market leader in our target geographies, and we see important opportunities to expand our addressable market. Our cost out program is resulting in demonstrated savings, making us all the more competitive, and positioning FuelCell Energy firmly on the path to profitability. Our accomplishments in 2007, and the opportunities we see ahead, put us in an excellent position to capitalize on the growing global demand for clean energy.

Global demand for electricity is spent to do almost double from 14.8 trillion-kilowatt hours in 2003, to 27.1 trillion-kilowatt hours by 2025, according to the Energy Information Administration. Who will capture this growth? Throughout this world, citizens, governments, and businesses are seeking ways to generate this electricity, using renewable and ultra-clean technologies. Certainly the high profile renewable technologies such as winds, solar, and bio mask will capture their fair share, but studies show these renewables energies are not alone in the ability to meet this demand. For example, solar and wind, due to their intermittent nature, can only be part of the solution. In the most advanced ultra-clean markets, where there is a high adoption of wind and solar, there is a growing recognition that to keep up with economic growth and associated electricity demand, and to balance these intermittent decisions to the grid, there is a need for ultra-clean, high efficiency base load power. We believe highly efficient ultra-clean, economical, and importantly 24/7 reliable direct FuelCell products can meet that need.

There is a significant momentum for renewable and ultra-clean solutions. Let me briefly review several of these initiatives. Internationally, 190 nations are meeting in Bali to discuss what happens after the [Kyoto] protocols expire in 2012. Interestingly Japan, Italy, and Spain, are reportedly the least compliant at reducing their emissions of the 36 nations's that signed the [Kyoto] agreement. These three countries are facing fines up to $33 billion, for failing to reduce greenhouse gas emissions, indicative of the value that carbon and emission credits will eventually carry.

In the U.S. the House passed the 2007 Clean Energy Bill, that included favorable provisions for fuel cells, with an eight year extension of the investment tax credit. The Bill proposed an increase in the available tax credit to 30% of the project capital cost, or $3,000 per kilowatt. The leaders of both houses are now working on a compromise Bill. I think it's fair to say, that the provisions of the fuel cell industry is looking for, are not the focal point of the controversy, so we are looking forward to a positive outcome.

Another Bill we've been following closely is the Lieberman Warner Climate Change Bill, which creates a new national carbon cap and trade system, giving a dollar value to the credits generated by clean energy resources. Although this initiative is in its early stages, it's important that two influential experienced legislators, one a democrat, and one a republican, have gotten behind cap and trade. Lately there has been talk about a Federal renewable portfolio standard, or RPS, like the ones that currently exist in 26 states, including here in Connecticut. Nationwide these states with RPS Programs represent a demand for approximately 25,000 megawatts of clean power by 2017. While this is one of the areas of considerable debate out of the Energy Bill, it is a concept that for the first time is gaining momentum at the Federal level.

Here in Connecticut, the State's RPS Program requires 20% of its power generation, approximately 850 megawatts, to come from clean sources by 2020. In larger states such as New York, and New Jersey, the percentages for clean energy, and the required megawatts are much larger. We'll talk more about it in a bit, but we believe Connecticut has developed a sound model for competitive supply of clean energy, a model that other states could adopt.

Before we review our overall progress for 2007, and our plans for 2008, I want to turn the call over to our Chief Financial Officer, Joe Mahler , to review our financial performance for the quarter. Joe.

Thank you, Dan and good morning everyone. I am pleased to report results for the company's fourth quarter, and year-to-date, which included the following positive metrics. Product revenue increased 65% quarter over quarter. Orders of 14.8 megawatts for the fiscal year topped by additional 9.45 additional megawatts in November and December. Total company dollar backlog with the November, December orders added in, increases to $111 million. Our product costs continues to drive lower, our cash use was in line with our expectations, a strong start to '08.

Shifting to the financials, total revenue for the fourth quarter was $16.5 million, compared to $9.1 million reported in last year's fourth quarter. Product sales and revenues were $11 million, accounting for over 66% of total revenues and increasing 65% from fourth quarter 2006 levels. Research and Development contract revenue was $5.5 million, more than double the $2.5 million reported in last year's fourth quarter.

At the same time the company was growing revenue, we also made important strides in reducing product cost. Our product costs to revenue ratio improved to 1.57 in the 2007 fourth quarter from 3.19 the prior year-- I'm sorry, 3.19 in the comparable period last year, and 1.91 in the prior quarter. This progress resulted from increased sales of megawatt class power plants, and the positive contribution of our cost out program, which involves continuous value engineering, development and application of technological advances, and improved material sourcing.

The company achieved significant year over year growth in product revenue backlog, which at the end of the fiscal year reached 57.8 million, more than twice the 27.9 million reported for the similar period, and up 17% on a sequential quarter over quarter. This backlog number does not increase orders in November, and December, from POSCO Power, The Lynd Group and Eastern Municipal Wastewater Treatment District of 9.545 megawatts totaling approximately $35 million, making the product backlog total, 93 million. The net loss to common shareholders was $16.8 million or $0.25 per basic and diluted share, a significant improvement over last year's net loss to common shareholders of $25.1 million, or $0.47 per basic and diluted share.

For full year 2007 the trends were also very positive. Total revenues were $48.2 million, up 45% from the $33.3 million reported for 2006. Product sales and revenues were $32.5 million, an increase of 51% from last year's levels of $21.5 million. The product cost of revenue ratio for full year 2007 was 1.9, significantly ahead of the 2.86 that we reported for full year '06. Research and Development contract revenue was $15.7 million compared to $11.8 million last year. Net loss to common shareholders for the full year '07 narrowed to $71.9 million or $1.16 per basic and diluted share, from $84.2 million or $1.65 per basic and diluted share for '06. Total cash and investments at October 31 were $153.6 million, fourth quarter net cash use was $13.9 million, similar to the $13 million of last year's fourth quarter. Full year 2007 CapEx were $4.4 million, of which fourth quarter represented $900,000. Depreciation expense for 2007 was $9.2 million, of which $2.2 million was in the fourth quarter.

To summarize, we enter 2008 with strong momentum. Now I would like to turn the call back to Dan.

Thank you, Joe. Demands for power generation is expanding around the world, and we offer a unique ultra-clean product that can generate high efficiency base load power almost anywhere. We are penetrating markets in the U.S., particularly California and the Northeast, Asia and Europe, where conditions enable customers to cost-effectively produce power with our products today. In responding to this demands we accomplished important milestones in 2007 laying the foundation for 2008.

In February 2007 we formed an alliance with POSCO Power, for the South Korean and Asian markets. Already POSCO made significant strides in expanding the Korean market, including the 4.8 Megawatt order we announced this morning. POSCO has ordered 12.6 megawatts so far this year, of which 12 megawatts, were megawatt class units. South Korea's clean energy program mandates that power first be exported to the utility grid, which favors the installation of our multi-Megawatt power stations. In October, POSCO broke ground on its fuel cell balance of plant manufacturing facility, scheduled for completion by end of 2008, at which point it will have the capacity to produce 50 megawatts per year, of balance of plan, running with just one shift. POSCO Power also formed a partnership with the Korean Electric Power Company also known as KEPCO, the largest electricity provider in the country, and the parent of all six of South Korea's major electric generating companies. All together, the KEPCO companies supply over 95% of the country's electricity, and have an installed generating capacity of 60 gigawatts, with anticipated growth to 86 gigawatts by 2015. Building on POSCOs global sourcing, manufacturing capabilities, and local know how, we look forward to expanding sales throughout South Korea and other Asian markets.

Closer to home, we made significant strides in California. During calendar 2007, we closed 8.35 megawatts of business in California, including the recently announced Lynd and Eastern Municipal Wastewater orders. That brings our current California installations and backlog to approximately 19 megawatts, or about 42% of our total. 7.75 megawatts of this year's California orders were from wastewater treatment facilities, a market segment that is particularly well suited to our product. Wastewater treatment facilities now represent 58% of our California business. Wastewater treatment creates a renewable biogas, which can be used to run our direct fuel cell products. (Inaudible) means the facility can make more kilowatt hours, with the same amount of gas, and the waste heat from our fuel cells can be used in their anaerobic digesters. This combined heat and power application can provide our customers with up to 85% efficiency from their DFC systems, compared to 35% from centrally located distributed power.

In November, we announced that we sold four power plants totaling 3.9 megawatts to the Lynd Group, the worlds largest industrial gases company, of the four DFC power plants three 1.2 megawatt DFC1500s will be installed at Lynd's customer sites, and operate on biogas transported by Lynd from the Point Loma Wastewater Treatment Facility in Southern California. The fourth unit, a DFC300 will operate on renewable biogas, and will be power Lynd's gas purification operations at the Wastewater Treatment Plant. This sale opens a new market for us. Commercial and industrial customers can now buy cost-effective renewable electricity, produced from transported biogas, and reduce their greenhouse gas emissions.

Demand for our megawatt class products continues to expand. During the fourth quarter Pepperidge Farm in Connecticut ordered an additional 1.2 megawatt DFC1500 power plant, increasing their total fuel cell power generation to 1.5 megawatts. This ultra-clean power plant will provide 70% of the bakery's electrical needs, and because the DFCs unit excess heat will be used in the bakery process, the fuel cells total thermal efficiency will achieve more than 80%.

Turning to Connecticut's Project 100, to date the Clean Energy Fund selected six projects using 68 megawatts of fuel cell energies products for review by the Connecticut Electric Utilities, and the state's regulator, The Department of Public Utility Control, or DPUC. Taken together, these six projects represent a potential for $200 million in sales, and range in size from a 2.4 megawatt hospital project, to a 20 megawatt grid support power plant. The utility review of the projects, and subsequent DPUC hearings were recently completed. The DPUC is scheduled to post its draft decision on December 21, and the final decision on January 9. We are enthusiastic about a positive outcome from the process, and will be keep you apprised of the progress as the DPUC decisions become public.

Turning to our cost out progress, during 2007 we focused on taking cost out of our DFC300 and DFC1500 power plants, and achieved an average 20% reduction. These reductions were the result of continued value engineering, improved manufacturing processes, and the initial steps in our global sourcing efforts. As we secure increased orders, our ability to purchase in larger volumes, and more fully implement our global sourcing strategy, will allow to us continue to reduce the cost of all our DFC products.

In government R&D, our program to develop new fuel cell products saw excellent progress in 2007. Under our contract with the U.S. Department of Energy we are working on the next step of our fuel cell turbine program, designing a megawatt class unit based on our 2.4 Megawatt DFC3000. Under our Department of Defense program to development an electric chemical hydrogen separation system, we were awarded a $1.2 million contract, to scale up the system for demonstration to commercial scale. In cooperation with air products and chemicals, we began construction of a system designed to co-produce hydrogen from our DFC300 product.

We are also in the second stage of a ten-year, three phase solid oxide fuel cell development program, created by the U.S. Department of Energy. Our subcontractor, Versa Power, successfully achieved a fourfold scale-up of a SOFC cell and stack technology, while FuelCell Energy completed a preliminary design of the megawatt class power module and balance of plan. We successfully completed factory testing of the ship service fuel cell, operating on diesel fuel, and shipped the unit to the Naval Sea Systems Command in Philadelphia, for additional LAN based testing. The company also received a $900,000 follow on contract to study advanced concepts for shipboard fuel cell power plants.

Now let's turn to 2008. Our cost out efforts for 2008 will focus on our DFC1500 and DFC3000 power plants, due to the increasing market demand for our unique megawatt class products. We are currently targeting an additional 20% cost reduction for both of these products in 2008. A key piece of this cost reduction will come from a product design change to incorporate our next stack technology upgrade. More power output from the same stack means lower dollars per kilowatt. The technology improvements for a 15% power increase were validated in our test facilities in Danbury. The testing including long-term sub scale tests in the building, and successful testing of a full size stack. This full size stack will now be placed in a unit in the field, to operate under real world conditions for most of 2008, prior to implementing the technology improvements in our production units.

In addition to the technology upgrade, increased order volume facilitates the next stage of our global sourcing strategy, which we expect to yield results throughout the year. In South Korea, POSCO Power is expected to open it's 60 megawatt per year manufacturing facility, to (inaudible) balance with plant systems for our fuel cells, under our ten-year agreement. POSCO will order fuel cell modules from us, and build its own cost reduced balance of plan. We expect to purchase these balance of plans for our own power plant sales outside of South Korea, enabling POSCO and FuelCell Energy to aggregate volume from our markets, and continue to drive down cost. Based on their strong performance in 2007, we believe 2008 will show continued progress in POSCO's efforts to capture orders, and expands their market presence.

California should continue to be a very strong market for us as well as more businesses, municipalities, hospitals and universities look for ways to eliminate pollution, and reduce their greenhouse gas emissions, they will increasingly turn to our base load fuel cells for reliable ultra-clean energy 24/7. Wastewater treatment facilities will also be an important market for us in 2008, considering the momentum we have in this market segment. With more reference customers than ever, we'll see growing demands for our DFC fuel cells there. In addition, the first order from the Lynd Group-- with having that in place, more commercial and industrial customers will find it attractive to buy renewable energy, generated by our fuel cells, fueled by transported biogas.

We are currently on target to increase our production to 25 megawatts per year by January. As our backlog increases, we have plans in place to increase throughput during the year. We will trigger those plans based on the outcome of Project 100, and the outlook from our other target markets. Building on our market penetration and cost reduction achievements, we are looking forward to taking the business to the next level. Operator, at this point I would like to open up the call to questions from our listeners.

Absolutely. (OPERATOR INSTRUCTIONS). And we'll take our first question from Sanjay Shrestha, at Lazard Capital Markets.

First of all congratulations for a great year. A couple of quick questions. First as relates to your backlog at the end of the fiscal year, at $60 million, how should we think about the revenue recognition associated with that for 2008 fiscal year?

Yes, Sanjay, it's Joe Mahler. I would push that backlog over 12 to 15 months, is probably how that will come through.

12 to 15 months. Okay. Now the second thing is you guys are talking about 25 megawatt by the end of the year, and it sounds like you guy's DPUC hearing is completed, so we get something incremental as apart of Project 100, December 21 and January 9, is there a risk given that we are dealing at the end of the day with the public utility commission that the deadline gets pushed out, and maybe it's one of the situations where we don't actually end up hearing on January 9, and maybe it's just a Q1, 2008 event?

Sanjay, it's Dan. It's always a possibility, but the hard part of this now is over. All the filings. All the work that the DPUC had to do to gather all the facts on all the projects, to make sure that what was done by the Clean Energy Fund, meant the intent of the legislation. That part is really done, so I would be certainly really surprised, if they didn't hold the deadline, and based on what we've seen from them so far, they are not giving any indication that they view the date as being at risk.

That's terrific. One last question for me, guys. Looking at the traction that you've had with your cost out strategy, the value engineering given where you are already with that, now that seems like some of the sales to Korea is actually going to go out as a positive gross margin, given the incentive program there, Connecticut 100 Project is going to be at least a break-even deposit to gross margin, you have a megawatt class product going through, so it's no longer just value, but it's also volume kicking in next year. Where could we potentially see cost of revenue ratio as we exit 2008?

Yeah, Sanjay, it's all a function as we've described in the past, it's all a function of the product mix. So each product line is coming down on plan, on target. The sub megawatts will have the highest cost ratio, the megawatts will have mid-range cost ratio, and then two megawatt plants should be approaching the one to one. As we increase the sales of two megawatt plants, that will drive the ratio down. I mean, our current backlog right now, is primarily megawatts type plants. So the cost ratio is probably, about where we are today, is probably a decent megawatt. We will have the cost reduced one megawatt plant coming through a little bit later in the year, so even those units will start to drive down to the one to one. So as soon as we can get the two megawatt plants into production, and into the stream, then the ratio will keep driving down.

Got it. Terrific. Once again, congratulations on a good year, guys..

And we'll take our next question from Brandon Cook at JPMorgan.

Good morning, nice quarter, guys.

Thanks, Brandon.

So the question with the production ramp up. It sounds like that's on track. Can you talk a little bit about-- any just how smoothly that's gone, and conversations you've had with suppliers and whatnot, about their ability to meet demand for potential ramp up?

Yeah, the ramping up for us at this point has really been bringing new people on, getting them into our manufacturing facility, getting them trained. That's actually gone very smooth. We are really happy with the caliber people we've been able to find, their ability to learn how we make the product, and to get into a productive state, in a really quick period of time. Our management team that's run the factory, I think is doing a real good job with that.

On the supply chain, since we had a lot of indications that the business was really going to be faced with a pretty significant ramp, we spent most of 2007 doing a lot of work assessing our supply chain, to really understand where all the bottlenecks were in each of our key suppliers. And then to make sure that we really weren't kidding ourselves, we actually hired a third party to do some validation of that, so we know exactly where each of the limits are for our suppliers, those places where we had some early sticking points. Those are the first things we've gone after to get alternate sources of supply on board and qualified. From a supply chain standpoint, we think we are at a pretty low level of risk, because we had a lot of time to prepare for this. Unfortunately because of Connecticut getting delayed a little bit, to where they are today, but it's certainly given us time to be ready to respond.

So it sounds like in your pretty good shape there. It was good cost site improvement in the quarter, the product cost of revenues down to 1.6 times. It sounds like that mix shift is going to continue towards the larger megawatt units. Could you give us a perspective on the deliveries that you had in the quarter, on the mix shift of units, of what they were in megawatt versus kilowatt units, and where that mix will be next year?

Yes, I mean, Brandon this is Joe Mahler, in the quarter we had a shipment of about 1.45 megawatts. I don't have right in front of me the break down between megawatt and sub-megawatt, and they will pull that together. Then as we go into the next year, Brandon, we will have in our backlog, we have at the end of the year about 15 megawatts, and we expect that backlog will come through over 12 to 15 month period. In that backlog we have, let me just shift pages here, we have 9 megawatts, one megawatt plants, we have one DFC3000 which is a 2.4 Megawatt plant, and we still have about 4 megawatts-- or actually 3.75 megawatts and sub-megawatt plants. When you push it out to the orders that have just come in, we actually add to that mix of 7.2 megawatts of two megawatt plants. So that's a pretty good mix.

So you can really see the mix starting to change to the larger plants, and the Korean market is clearly going in that direction, and then Project 100 as that comes in, is all two Megawatt plants. That's how the mix change is occurring.

That's helpful color. Just final question on cash flow expectations looking towards the first quarter. I see there's certain uncertainty with the Connecticut project, but any sense on what to expect from cash flow there?

Cash flow, what we see, is we see improving margins, so we expect head-to-head, apples-to-apples, we expect cash flow to get better. Then cash flow if you look at, we have a ramp process in place here. We are going to spend capital, I think we've announced this before, capital of up to $14 million in the next year. And so you probably have some, some of the improvement in cash flow will be offset by the capital to increase our capacity in the next year. So we would expect to be honest, cash flow to be around the same. We are looking at about $15 million less per quarter, plus or minus that capital. And then there's probably a little bit of a working capital, incremental as we continue to ramp the business. Although we have captured a big part of that already.

Okay. Great. Thanks for the time.

We will go next to Walter Nasdeo at Ardour Capital.

Good morning, guys. Could you maybe kind of give me a little more clarity on how the markets in Europe are developing? You talked about Korea and some of the U.S. markets, but what's going on in Europe right now?

In Europe we really have been waiting for our partner over there to come through-- the acquisition that that business has been through. A private equity firm purchased (inaudible) which is the engine business of DaimlerChrysler, and that is where that fuel cell business resides. That activity has now concluded, and that new team that now they have been through a spin-off, and look like they are pretty well capitalized. We are meeting with their management, in fact we had several meetings during the quarter here, of looking at how do we accelerate what's going on in that marketplace, because the market itself looks like it should be one that is really primed for our product, it's primed for the technology. So we are working with our partner over there to find out how we can move things faster, because it looks like a market that we should be doing more in.

Right. Okay. So there's no expectation on when you are going to start ramping that back up again?

Not yet but I suspect over the coming quarter we will have more visibility to that because we have several meetings already scheduled with them.

If you can kind of give me an update on how the whole fuel cell micro turbine hybrid is coming along?

The demonstration project that we did with the sub-megawatt scale, where we 250-kilowatt fuel cell, coupled it with a (inaudible) micro turbine, that demonstration went very well. We actually built it, tested it here in our facility, then shipped it out to a customer site where it has run very well. We are now in discussions with, what's next, because the demonstration part of that program is over. We know that the end user customer would like to have it there, but we also know that it would probably be more to our benefit to put it in another location, like some place in Japan, that really values efficiency, so we are having some discussions with some potential end users, that would get it in a little bit higher profile location.

In the meantime we are working on the megawatt class design of that product, as a result of the program that we have with the U.S. Department of Energy. So we've been leveraging the thing that we learned from that sub-megawatt demonstration, and getting ready to get to the point where we can look for a demonstration for the megawatt class product.

Speaking of efficiencies what were the efficiencies on the sub, and what do you expect them to be on the megawatt class?

The sub-megawatt we actually demonstrated 58% electrical efficiency. On the megawatt class, we would expect it to be 60% or better, depending on what turbine we ultimately configure with the system.

That's just electrical efficiency?

Electrical only.

Interesting. So would you expect the overall efficiency to be a shade higher than that.

Yeah, and as carbon gets monetized here, it's really going to be a pretty significant play to have something that is basically going to be world class, from an electrical efficiency standpoint.

I appreciate it. Take care, guys.

We'll take our next question from John Quealy, at Canaccord Adams.

Hi, guys, this is actually Mark Seigel for John. A couple of quick questions here. Are there any specifics or any formalities, to any possible Lynd Group agreement coming any time soon?

I'm not sure I understand your question.

Just wondering are there purchases in the quarter, just one off, or are there any implied understanding for minimum purchase levels going forward or--?

They don't have any minimum purchase levels, but if you could think about sort of their business a little bit, what they have done is they figured out a way to leverage the infrastructure they've already invested in, all the transportation trucks and everything else, the business that they know very well, the treatment of waste gases, and the technology that they have is relatively unique, and put that together in a way that allowed them to really open up a marketplace.

And what's even more interesting for them is, being a large company with a large balance sheet, it gives them the ability to enable a lot of business, simply because they can bring their balance sheet and own the fuel cell equipment, own the clean up equipment, and cell power back to the end users. For them it's really a matter of capitalizing on this model they put together, before some of their competitors start to look at it and figure it out as well. I think you are going to see them working to try and leverage the position they've got in the marketplace, before folks like Air Products or Air Lockheed or others, that have similar businesses, try to come into the same space.

Okay. And then just one other question. On the further 20% cost reduction you're targeting for a fiscal '08, in what time frame should we start to see the results of that? Is it more skewed toward the back half of the year, or how should we look at that?

You will see the sourcing things come through in the middle, to the back half of the year, and in terms of the implementing the technology up-rate, it will certainly be at the back half of the year. We want to make sure that the technology improvement we made in the stack, we have fully validated in the field units. We want to make sure there are no surprises, before it flows to production.

Great. Thanks very much.

And we'll take our next question from Stuart Bush at RBC Capital Markets.

Good morning, this is Anthony Reilly for Stuart. Congratulations on the quarter.

Thank you.

Two quick questions, one, we know you are going to be ramping to 25 megawatts production capacity by January of next year. Any update, or expected time line of when you might reach the next benchmark of 60 megawatts capacity?

It's-- going to 60 megawatts is really a function of what we see out of Project 100, it's what we see out of Korea and California. Looking at where we are today, staying at 25 megawatts almost regardless of when those thing happens, looks like we are going to have to do some level of ramp beyond that, just because we are seeing continuous order flow here. Really it's those big projects are going to drive how quickly we get to that 60 megawatt level.

Second question concerns your current product costs for your three DFC units. During the second quarter this year you very nicely broke out your unit costs per the three different models. Would it be possible for you to provide an update, kind of what your cost per kilowatt is right now, so we can benchmark that moving forward into next year?

Sure, let me take that one. We ended up '07 with the sub-megawatt product moving down to about $41 a kilowatt. The one megawatt product is at the target level of about $3,400 a kilowatt, and our megawatt product is actually in production now at $32.50 a kilowatt. Those are the number that you should begin to see in '08 on the financials.

We will take our next question from Pavel Molchanov, at Raymond James.

Good quarter, a question about Enbridge. You've talked before about that being a potential sale of channel for you guys. Any status update on that?

Yeah, the first unit of the FuelCell with energy recovered generator, is going to be built in Toronto at their headquarters. Most of that sight work is pretty far along. We are about to ship the unit to them. It's going to be installed a little bit later this year, when it begins operating. Enbridge was also a participant in the project that we bid in Connecticut. It's a nine megawatt project in Milford, Connecticut, that takes that DFC ERG and applies it at a gas distribution station.

So I think we've got a couple projects that are really well underway. I think until we get the unit in Toronto built and operating, I think everybody wants to see that happen, because the gas companies by their nature, are a little bit conservative. So to have other gas companies ability to go see the unit operate, talk to Enbridge, find out from their experience, I think will be key, and really starting to explore more opportunities, but they seem very well committed to moving this thing forward, and trying to leverage what we've done so far.

What do you think is-- hypothetically what's the potential market opportunity from the utility segment?

The utility segment is huge. Just if you look, just gas utilities, I mean Toronto itself is 40 plus megawatts. If you look at the Northeast and California, it's 200 to 300 megawatts. And then if you get into the opportunity for utilities to own generation as part of complying with their RPS obligations, it's literally thousands of megawatts.

Got it. Okay. Thanks very much.

And we'll go next to Adam Hinckley, at CIBC World Markets.

Hi, good morning. So getting back to the capacity expansion time frames, I know that there's nothing specifically stated on above 25 megawatts, but what would be the lead time in order to get from 25 to 60 megawatts? I know you said from 11 to 25 is mostly just hiring. Is there anything more than hiring we should think about, equipment purchases, anything like that?

Yeah, we talked last quarter that we were going to spend about $14 million in capital. That capital really is to get the expansion in place to get the 60 megawatts. Most of that capital really is expanding our conditioning facilities on the megawatt class products. We have in place now 25 megawatts per year of sub-megawatt conditioning, 25 megawatts a year megawatt class conditioning, but with almost all of our growth coming on the megawatt side, we really wants to expand the megawatt class conditioning as soon as possible.

That's why we made the decision last quarter to go ahead and spend that capital so we will have that equipment designed, built, installed and in place so what really pace it is bringing on people in an orderly fashion.

What would the lead time be to bring on the conditioning equipment?

We would expect-- assuming we are making the decision to go forward and doing all the thing we are planning, we would subsequent that condition to be in place and ready to operated in July.

And then in terms of the 20% cost reductions on the megawatt, and multi-megawatt product, how much of that 20% cost reduction is coming from sourcing of the balance system from POSCO next year?

We aren't including any of that from POSCO yet. As we get through POSCO getting their facility operating, as we see their products pass the certification test, then we will start to fold that in. For now it's all things we are doing outside the POSCO relationship, in terms what have, we know, we can count, and bank on. So POSCO represents just more upside on our cost reduction efforts.

Will POSCO, I know it says they are going to be coming on line at the end of the year with the full 50 megawatt capacity, will they have any production output coming before the end of the year, or are they waiting until everything is fully installed to start production?

They actually have already purchased parts, and a fuel cell module from us for a sub-megawatt unit, which they are in the process of building right now. So they can get their people trained, they can understand how the product comes together. I would expect they are going to continue on that process, and do the same thing on the megawatt class. I would expect before the facility is designated completely operational, we will start to see them making some things for their own domestic market.

Thank you.

And we'll go next to Michael Molnar, at Goldman Sachs.

Hey, guys. Good morning. Just one quick question, most of my questions have been answered. Can you just give me some sensitivity to the economics at different gas prices? How much would the economics change if gas went to $12 or $13? Could you give me any color on that?

Sure, let's start at our current gas prices in California are about $8, the pricing we are seeing in the New York region is between $10 and $12 a million BTU. Our calculations, and it's all a function of the calculation of the efficiency of the utilization, the BTU utilization of the fuel, but $8 BTU is about $0.06. For every $2 move, it's roughly $0.0125 higher. For each $2 move add $0.0125 So a $4 move would be $0.0250 so you would be $0.0850 a $12 gas.

The key for us, and why we are getting a lot of positive response on long-term policy, is because we do have very high electrical efficiency in the current single stage products, and a really phenomenal path on a multistage products, combined cycled products, to get the highest electrical efficiency in the marketplace. So we've been dealing with a lot of long-term policy question of how do fuel cells fit into RPS's, and how do fuel cells fit into the models, and the electrical efficiency is a big winner for us.

Great. Thank you.

(OPERATOR INSTRUCTIONS). We will go next to John Adams, at Canaccord Adams.

Good morning, gentlemen. Easy question for you. The order today from POSCO is not scheduled for delivery until '09. Is that because they want to supply the balance of plan and won't have capacity for that until '09? Or is there some other reason?

It's really only because we have not made the decision to go beyond 25 megawatts yet. They asked us when we make that decision, to please accelerate their delivery, and we told them we would do so.

Outstanding. As long as nobody else has touched on it, how are things in Japan?

Actually very good. We are starting to see the business turn around there. They have been troubled by an inverted spark spread. The senior management of our partner Marubeni was over here about a month ago, and what they are looking at now is, how do they start to re-engage and capture more orders, now that they are starting to see that process turn around out there, so we expect to see some things out of them that are going to be pretty meaningful in '08.

Great. Thank you sir.

Thank you. At this point I would like to thank everybody for joining us on today's call. We are looking forward to speaking with you in our next conference call, when we will have some additional updates on our progress. Thank you.

This does conclude today's presentation. We thank everyone for their participation. You may disconnect your lines at any time.