燃料電池能源 (FCEL) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the FuelCell first quarter 2008 earnings results conference call. Today's call is being recorded.

At this time, I would like to turn the conference over to Lisa Lettieri. Please go ahead, ma'am.

Thank you, operator. Good morning everyone and welcome to FuelCell Energy's first quarter results conference call. Delivering remarks today will be R. Daniel Brdar, Chairman and CEO, and Joseph Mahler, Senior Vice President and CFO.

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 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 will now turn the call over to Dan Brdar. Dan?

Thank you, Lisa. Good morning, everyone, and thank you for joining us today for FuelCell Energy's first quarter conference call. Today, I'll begin with an overview of the period, followed by a review of our financial performance by our Chief Financial Officer, Joe Mahler. Our $29 million in orders is the single best quarter in the company's history, increasing our product and service backlog to a record $84.7 million. Over the last two years, we laid the groundwork to propel our drive to profitability, penetrating key markets, continuing to bring down our product costs and expanding our manufacturing capacity. In the first quarter, we signed 9.45 megawatts of new orders, moved our five-year stack into production, produced lower cost DFC 300 and DFC 1500s and doubled our manufacturing run rate to 25 megawatts per year.. I will go into more detail on these activities in a few moments but first let's turn the call over to Joe Mahler for a look at the company's financial performance during the quarter.

Thank you Dan and good morning, everyone. I am pleased to report that the company's first quarter 2008 financial results improved over the prior year. Total revenues for the first quarter were $15 million, more than twice the $6.8 million reported in the similar period last year. Product sales and revenue doubled to $9.8 million from $4.9 million driven by increased orders for megawatt class power plants. Research and development contract revenue totaled $5.3 million, up from $1.9 million last year. Our order volume for the first quarter was strong. We booked $29 million of new product orders in the quarter and increased our backlog to $84.7 million, a 131% increase over last year's 36.7 million and a 47% sequential increase over fourth quarter 2007 levels.

Our product backlog today stands at 21.6 megawatts, driven by megawatt class orders from customers in South Korea and California. As we look ahead, we expect the Connecticut Project 150, 16.2 megawatt projects to add an estimated $43 million to the backlog. Our product cost to revenue ratio improved 27% on a year-over-year basis, coming in at 1.99 for the 2008 first quarter compared to 2.73 in 2007. This resulted from increased sales of megawatt class power plants and reduced unit across all product lines. This continues our trend of improving costs. While the year-over-year improved significantly, the cost ratio compared to the fourth quarter was up from 1.57.

There are several factors causing this. Increased revenue from higher costs, sub megawatt sales came through in the quarter. We recognized revenue on older 250 kilowatt and older one megawatt units as we transition to the megawatt and multimegawatt model. Inventory increased to support the growing backlog. Inventory increases were adjusted for fair value. Ramp-related costs were an impact as we brought our annual production rate to 25 megawatts and continued planning for further expansion, and service costs compared to the prior quarter were higher due to timing of the replacement cycle for our three-year stacks. In the quarter we moved our five-year stacks into production. The key driver for reducing the cost ratio continues to be the multimegawatt and megawatt volume. We see the Korean, Connecticut and California markets providing this.

The first quarter net loss to common shareholders improved to $19.7 million or $0.29 per basic and diluted share from $20 million or $0.38 per basic and diluted share last year. Due to improving product margins, we were able to double revenue while reducing net loss. The loss on product sales increased $1.2 million and was offset by a margin improvement of 800,000 on research and development contracts. Administrative and selling expenses were approximately $400,000 higher due to increased marketing costs, research and development expenses were lower by $1.4 million over the prior year as certain development objectives were met in the quarter. Cash used was $15.1 million for the first quarter in line with our expectations. At January 31, 2008, total cash and investments was $138.6 million. In the quarter capital expenditures totaled 1.5 million and depreciation expense was 2.2 million. In summary, 2008 begins with strong order growth. Dan?

Thanks, Joe. As I review highlights of our first quarter, I want to underscore the progress we've made building on our leadership position in key markets, continuing to make gains on our product cost-out program and continuing to put in place the operational capabilities we need to sustain and expand our going forward. Let me discuss each of these areas separately.

First, in market leadership, Asia and California are leading the way to a greener future by demanding new sources of clean, reliable power. Because of their low emissions profile, 24/7 advantages and affordability in our target markets, our Direct FuelCell product are highly competitive. Very simply, DFC power plants meet the worldwide need for ultra-clean energy generation. During the first quarter, our partner in South Korea, POSCO Power, ordered 4.8 megawatts of DSC power plants, bringing the total orders from POSCO to 12.6 megawatts during the last 12 months. We believe these orders are just the beginning because of the increasing power needs of the Asia Pacific region and because POSCO power is uniquely positioned to help meet that need. Electricity consumption in South Korea and across Asia is booming. During the last fifteen years, South Korea's electricity consumption has grown 9% a year and strong demand is anticipated to continue during the next decade.

To meet the demand for power generation equipment, POSCO power is currently building a balance of plant manufacturing facility. The facility will be complete later this year with an initial BOP production capacity of 50 megawatts per year growing to 100 megawatts per year by 2010. POSCO Power will order FuelCell modules from FuelCell Energy to integrate with its balance of plant. POSCO's primarily focused on megawatt class sales in South Korea and worked with the Korean government to develop an incentive program that encourages grid support FuelCell applications. To further this enterprise, POSCO power formed a marketing alliance with Kepco, South Korea's only utility company. In California, we continue to see increasing demand for our DFC power plants. The renewable biogas market is especially strong. Over half the power plants in our installed base and backlog in California are renewable fuel applications. Similarly worldwide 25% of our installations and backlog are renewable fuel applications. The eastern municipal water district in southern California recently ordered three DFC300 units that will operate on renewable biogas generated by their wastewater treatment facility.

The water district expects to reduce its carbon footprint by over 10,000 tons annually and because our power plants are up to 80% efficient in combined heat and power applications they will use less fuel to make the same amount of energy resulting in meaningful energy savings and emissions reductions for the municipality. Our first quarter sale of 3.9 megawatts of DFC power plants to The Linde Group, the world's largest industrial gas company, is a very interesting new business model for customers using our products. These power plants will run on biogas that Linde transports where they will generate renewable ultra-clean energy using FuelCell Energy power plants. This model allows Linde to leverage their existing infrastructure and investment in gas cleanup technology and transportation equipment. More importantly, it also allows end user customers to have economical on-site renewable power generation while avoiding fuel price volatility. This unique model is the first time that biogas will be delivered to distributed off site customers that want power from renewable sources and can lead to greatly expanded markets for us.

In the world's move to renewable energy, we're seeing increased use of anaerobic digesters to manage waste byproducts and increasing focus on using the methane produced. We see a large existing market. For example, there are more than 550 municipal waste water treatment facilities across the United States and hundreds of anaerobic digester installations worldwide that generate enough methane to power our fuel cells. Looking to the future, we're seeing industry and municipalities take a much more strategic view of these renewable biogas resources as they incorporate anaerobic digestion into their development and construction plans.

Turning to Connecticut, the State's Department of Public Utility Control approved 16.2 megawatts of projects under project 150. These projects will incorporate six of our DFC3000 power plants. By the end of April, all approved projects are to submit evidence of firm commitments for project financing to the DPUC. Once this is complete, the projects are free to enter into power purchase agreements, equipment supply contracts and begin construction. We also received contingent approval for an additional FuelCell project, the 19.6 megawatt Danbury triangle project. We will keep you up to date on these projects as we convert them to orders.

The DPUC also called for the next 25 megawatts of projects to be under contract by October of this year. Beyond Project 150, Connecticut still has another 650 megawatts of clean energy to get under contract by 2020 as part of the state's renewable portfolio standard mandate. Under the recent bidding there was considerable debate as to the availability of sufficient biomass fuel and whether wind and solar are viable options for the state. Connecticut is typical of many states and regions of the world that have limited bio mass resources, no meaningful wind resources and inadequate solar profiles for cost effective solar power. Fuel cells make sense in these markets because they're not dependent upon limited sources of fuel such as biomass or intermittent sources for power. We believe that their fuel flexibility, ability to operate on a variety of renewable and readily available fuels and base load operating characteristics will make them a cornerstone of any RPS strategy. The success that we're seeing in Connecticut and South Korea demonstrates that fuel cells can play an increasingly important role in fulfilling RPS mandates. We expect other locations will follow their lead as we demonstrate our products in larger applications.

Let's shift now to our cost out program. As many of you know, we consider it critical to obtain grid parity so we can sell our power plants without subsidies and compete effectively against other sources of power generation. To that end, we substantially reduced our product costs every year since we began shipping our DFC power plants in 2003. Last year we reduced cost of our DFC300 by 14% and our DFC1500 by 24%. In 2008, we're targeting cost reductions of 20% for our megawatt class DFC1500 and DFC3000 power plants, strategic sourcing and continuing manufacturing improvements. Also, our new five-year stack went into production during the quarter, extending the life of the DFC FuelCell's core technology by two years and as a result reducing the operating costs of our units.

A large part of the savings for our next round of cost reduction will come from our next power operate of approximately 15%. The full size stack testing was completed in our test facilities last year and we're now operating a unit with the technology improvements at a customer site. We expect the new higher power output units will be put into production in the middle of next year. Improvements like these along with increased volume that we're already see willing move us to profitability. At a production rate of 35 to 50 megawatts per year we expect to become gross margin positive and at a production rate of 75 to 100 megawatts per year we should be cash flow positive. The exact level depends on the product mix running through the factory but the more megawatt class production in the mix the lower the run rate needed.

As our recent orders growth demonstrates, there's ample evidence that the market for megawatt class solutions is growing. It's our megawatt and multimegawatt systems where we can capitalize on manufacturing and sourcing economies of scale to produce our lowest cost per kilowatt products in our best margins. This is a good place to address the operational capabilities FuelCell Energy needs to sustain growth. In January we brought our manufacturing production rate to 25 megawatts per year, more than doubling our previous run rate to meet demand from South Korea and California. With 22 megawatts of backlog we're well matched to current demand. As additional orders from South Korea, California, and Connecticut are added to backlog we'll evaluate the need to further ramp up our production.

In preparation for continued growth we're increasing our equipment and production capacity to 60 megawatts annually from 50 megawatts to better meet demand for megawatt class product. This includes adding additional final assembly, testing and conditioning capabilities as well as manufacturing equipment and process improvements. Beyond this modest capacity increase, we've completed ramp planning for the operations enhancement required to successfully ramp the business to 60 megawatts, 120 megawatts and then to 240 megawatts so we're ready as demand warrants. This planning includes detailed supply chain evaluation incorporating new vendor qualifications and global sourcing. We're also planning facility layouts, equipment additions and optimal manufacturing process configurations for the business as we reach these higher he production volumes.

Before I open the call to take your questions, let me give you a quick update on the legislative environment for energy. Nationwide, the significant momentum for renewable and ultra-clean sources of power shows little signs of slowing down. The number of U.S. states with renewable portfolio standards continues to increase. As of the latest count, there are now 28 states plus the district of Columbia, which significantly expands our addressable market. The renewable energy and energy conservation tax act of 2008 is back in the spotlight. We're watching progress closely because it extends the investment tax credit for FuelCell installations to 2016 and increases the incentive to $3,000 per kilowatt. This bill is the same that was passed by the house last year but failed to pass in a close vote in the Senate. With energy prices at record levels and increasing pressure to reduce greenhouse gases we're cautiously optimistic that the house and Senate will see the need to continue to invest in clean energy.

At this point operator please open the line so we can take questions from our listeners.

Thank you sir. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). We'll pause for a few moments to assemble the queue. And our first question comes from Sanjay Shrestha.

Congratulations. Couple quick questions. Can you remind us in terms of the time line that would be required for you guys to go from 60, 120, to 240 megawatt and the CapEx required?

On 60 to get to 60 we have 14 million that we are going to spend this year to have that capacity in place. To ramp to 60 is really a matter of bringing people on board at that point, so with the design work already in process, equipment already under procurement we could actually be at 60 megawatts by late summer. To go from 60 megawatts to 120 takes 30 to $35 million in capital and will take us about 18 months from the time we pull that trigger to actually have that equipment in place operational and people on board to operate it.

Okay. Terrific. And also, at question, more on the backlog, obviously you guys have done a great job from this cost-out program. It's getting better every year, and as the creasing mix of megawatt class product in this backlog, if we were to look at cost of product ratio in your existing backlog right now what would that look like?

Let me -- Sanjay this is Joe Mahler.

Joe, how are you?

In the backlog we have four megawatts of submegawatt, and we have 10 megawatts of one-megawatt, and seven megawatts of two-megawatt plants. The backlog -- and we still have some older units -- older units coming through. So in effect the submegawatt would be somewhere in the high 1's, approaching 2, maybe slightly higher. The megawatt plants are probably one and a half range, and the megawatt should be, at this point we really haven't -- we've all been anticipating the Connecticut order coming through, we're anticipating multimegawatt activity out of the Koreans and we haven't been able to launch that. It's coming, and so we're trailing on that, but the megawatts, as we talked, the cost is around $3200 a kilowatt. Should be in a one to one, to 1.1 range in '08.

Finally at the point where as more and more of this multimegawatt class product comes in with the increasing revenue you would also start to get the benefit of the decreasing cash.

That's the model. Sometimes it takes a little slower than we'd like but that is clearly the model, and certainly the 16 megawatts in Connecticut will fill that model.

Exactly. One last question. As it relates to the backlog how should we think about the -- how is the backlog going to hit the P&L and how should we think about that?

Timing?

Yes.

now that we're at the 25 megawatt run rate and we have 21.6 megawatts in backlog, it should take less than a year.

Perfect. That's terrific. I'll hop back in queue. Thank you.

and our next question comes from Pearce Hammond with Simmons & Company international.

Joe, guidance for '08 for product cost to revenue ray show, could you provide any there for the full fiscal year?

We haven't gotten that past, Pearce. It's really a function of coming off where we are and driving to this multimegawatt driver. The real driver to getting cost out is putting the two megawatt -- the multimegawatts in and more megawatt plants, the newer megawatt design in, the newer megawatt design probably comes in third quarter. Getting those into production plan really starts to drive this thing into that multimegawatt plant should be at that 1.1 ratio and the 1-megawatt plants will be a little higher than that. That's really what we're driving to. Meantime we're transitioning the older inventory out, the older units out, and it's just going to -- it will come to that model pretty quickly once we put those new orders in.

Follow-up on Sanjay's question, so you would expect over the course of the next 12 months to realize that backlog?

Yes. We now have -- we're in pretty good shape. We have 21.6 in backlog. We really believe we're going to get the 16.2 out of Connecticut, so you really have a 38-megawatt backlog, so there's no reason to be holding back. We've got a 25-megawatt run rate, it's full bore. We expect to be pushing that out.

When do we -- when would you expect the Connecticut orders to actually hit the backlog?

We would hope, I mean, the technical period is the 90-day period from January 23rd, so you're talking about having absolute go ahead around April, so I'd say end of April, May is when we'd expect that to hit.

One final question. When the POSCO plant is up and running, how should we model the sales there? How should we think about that?

I think what you should see from us is evidence of orders.

What sort of revenue would you receive -- you're obviously just selling the stacks at that point. Would that ratio be a positive ratio for the stacks that you would be selling? Positive gross margin on the stacks?

The answer to that, our initial thinking would be whether or not it was a stack or a full power plant that the same cost ratio impact should be achieved, which means that as we push -- I think we've been saying, as we push volume of the multimegawatts through our facilities, then we should start to -- for example, I think we've talked in the past, a full power plant costs $32.50. As we push volume through we should be able to get that number below 3000. On these stacks we should expect the same results.

So think about it in the same way, just obvious well --

It's not 100% of the total cost, but the modules, that relationship should be pretty similar.

But would it -- should it have a better margin profile? Because you're just essentially selling the stacks?

It can, but our initial thinking is that we're still high -- we're still driving our costs down, okay, so to achieve that, I mean, you're right on target in terms scruff an incremental margin opportunity because it's proprietary technology, we're the only people in the world making it, but we're still in that transition that we still have $3200 going to $3000 stacks. I'm not sure you accomplish that in the first bulk order process, but I think that that model opens up. As you start to get your costs down further, I think that model -- that differential will occur.

Thank you so much, guys.

And we'll move on to our next question with Walter Nasdeo with Ardour Capital.

I want to follow up on some of the stuff that's been thrown around by the previous calls. And kind of going back to the Connecticut order, what's the effect of the reduced order on your cost-out program and the velocity of that?

It's really pretty straightforward. Getting 16 megawatts is really -- what we have is a series of triggers, what. we're looking to do at this point in time is to expand the capacity and get this model -- get more capacity and get more volume through the facility to get the cost out faster. What the Connecticut order, what we were looking for originally was to use, say a 35-megawatt order, which is still potentially there if we can pull off the triangle, and crews that as potentially a trigger to expand capacity, move to 32 megawatts of production, move to 45 megawatts of production and then that combined with Korean orders that we would expect as they build the facility there would trigger the capacity expansion. I think it delays -- it slows it. I think we're still making very good progress on cost-out. I think we have the continued design change, design work we're doing to reduce costs, but I think it doesn't allow us to at this point expand our capacity to capture all of the volume cost out. So I think you're going to see improvements. We're on the right track. I think you see the megawatt plants multimegawatt model will start to kick in once the Korean and the Connecticut process moves forward and you think we'll be right there.

Okay. Now, other than Korea, California, and Connecticut where, are you looking at to sea other significant orders coming from? We haven't really seen much out of Germany lately. Is there anything going on there?

We've actually been working with our German partner over there now that they have come through the sale of their parent company. We're going to be meeting with them next week. The focus really is for us collectively to figure out how do we do more in Europe more quickly, because if you look at the level of orders that we've gotten from Asia, from California, and now from the northeast, it's significant higher from Europe, and Europe is a market that we believe should be producing significantly more. So we're continuing to work with the senior management of our partner over there to figure out how do we accelerate that process for Europe.

Then obviously I can't stop my questions without asking you how the turbine FuelCell hybrid is coming.

We've got the unit that we had put a a customer site, we've brought it back to do some modifications to it because we intend to send it over to a location in Asia. There's some controls that we need to revise and some configuration changes we need to make to have the unit meet some of the codes in Asia. We hope to be able to have that thing under an agreement in the next couple months, ship it off to a site where the efficiency makes an important impact on what we're trying to do in the market. Hopefully we'll have an announcement here coming forward about where it's going to be going.

Very good. Dan, did you say it's going to take between 15 and 30 to go from 60 to 120 megawatts?

No, 30 to 35 to go from 60 to 120.

Okay, thank you.

We'll take our next question from [Mark Sigel] with Canaccord Adams.

Couple questions. First, regarding POSCO, do you see them as continuing this pace of order flow ahead of their facility coming on line? Is there any more sort of preordering to be done there?

Based on what we're seeing from them and discussions we've had with them recently, it looks like they're about shift to module orders. We'll probably see maybe another order out of them where they buy components to assemble one of our did he signs themselves but it looks like they're ready to start to make that transition to order just modules.

Okay. Great. And then on the cost-out program, are you guys seeing any inflationary head winds there, whether it's in metals or any other materials?

We actually have already seen it. If you look at what happened with nickel and stainless steel, they all peaked last year. We've seen those prices soften, particularly nickel has softened considerably. So we have continued to drive the cost down despite the pretty significant spike that happened, particular on the nickel side. Fortunately we have a product that's pretty early in its life cycle so there's still a lot of ability to offset those commodity price increases.

Lastly do you guys have plans to bid into round three of project 150?

We working on that right now. We are going to participate and we're figuring out what project that we want to put in. We'll probably see some of the projects that did not get selected that you know last round but we're also looking what it some new and creative project would look like as well.

Would those be bids for the full 25 megawatts or something less?

I suspect that the 25, because it's in the a big number, is going to be significantly oversubscribed in terms of what totals go in from a bidding standpoint.

Okay, great. Thanks a lot.

Moving on to our next question from Pavel Molchanov from Raymond James.

Wanted to get an update on your end bridge opportunities. We haven't heard about that recently. Any update on that?

Sure. The end bridge unit that is going to go into Toronto which will be the first fuel-cell turbo expander combination is under construction now, the turbo expander is in. They are finishing up some of the site work. The unit that we're going to install on the FuelCell side, it has been built, it's ready to be installed. They have to get through some last permitting issues they're dealing with up in Toronto. We expect the FuelCell turbo expander to be operational this and then end bridge is also a participant in the 9-megawatt project that was select in project 150 for the Milford site. So that will be the first multimegawatt installation we'll see in the U.S. The discussions with that project in terms of the participants are pretty far along so it's really getting through the submittal of evidence of financing in April, and that project will be able to start moving forward and get into construction. So getting those two installed and operational are pretty important. I think gas companies want to see units operate but meantime we're seeing end bridge work with our gaze to identify other sites here in the U.S. we think would be good application both in the northeast and in California.

Got it. Thanks very much.

You're welcome.

And we'll take our next question from Rob Stone with Cowen and Company.

Hi, guys. Couple questions, if I may. First, the biogas opportunity sounds particularly intriguing. Could you estimate -- you mentioned a number of municipal waste facilities around the country. Could you estimate how many megawatts of installation that number of sites might ultimately support?

I don't think you can get all 550 of those sites. I would say there's probably 200 to 600 megawatts in that kind of play.

What's interesting that we're seeing in California, we had always thought the targets for us were going to be places where they were either flaring the gas or potentially burning in a boiler but with some of the California installations we're actually starting to see engines get replaced with fuel cells. We think there's an opportunity as part of this natural equipment replacement cycle at these wastewater treatment facilities. What's turning out to be a pretty big market for us that we really are just starting to get our arms around is not just digesters for waste treatment but the food and beverage processing. If you think about what we did at the Sierra Nevada Brewery, the Gil's onions orders, Kiren Brewery in Japan, it's turning out that food and beverage processors are turning to those anaerobic digesters because they're trying to find better ways to deal with the waste that comes from preparing prepackaged foods. As they install digesters it turns out it produces a great fuel for the FuelCell. So I think we're going to see more of the food and beverage applications.

The other thing you have is that number that we talked about at the beginning is really a muni waste water, which is one slice of the market. The Japanese market is over 2,000 megawatts. They've been very focused on anaerobic digestion. I think the United States is really just catching up in terms of new construction and new strategy as to using this waste stream to produce, in effect, renewable solids and fertilizers plus this renewable biogas that comes off the back end. So we think this is going to be a significant growing market.

What percent of the sites do you estimate are just flaring the gas at this time?

We've been having a tough time getting good data on that. There are quite a few that flare but we're finding that most of them are typically putting in a boiler to generate steam is and we're finding particularly in places like California they're getting a lot of pressure to stop doing that because of the pollution that it creates if you just burn it. So I think it's more going to be a function of what shifts from being burned in a boiler into turned into power generation use, particularly using fuel cells.

A related question with respect to the Linde opportunity and delivering biogas to sites beyond the wastewater or other treatment facility. How does the cost of delivered biogas in that kind of a setup compare to natural gas and, you know, sat straightforward economic trade, or are sates like that counting on some additional credit because they're using a renewable source?

No, most of the installation that Linde is looking at, they've identified in part of their own business model how far they can economically afford to transport the gas. They want to go in and basically be able to make a pitch to a customer that they can save money versus what they're paying their electric utilities. So it's really an economic play, what they're trying to offer the end user customer. And then the end user customer also gets the benefit of saying they're now generating their own power using a green resource.

The other interesting -- the other very interesting aspect of the Linde business model is that, in effect, they're producing a gas, it's the cost of the cleanup and the transportation less than what the commodity costs in the marketplace but what you eliminate over a ten year contract is the commodity risk. If you were comparing yourself to natural gas there really is no natural gas commodity risk that comes into play because you know what the cost of producing the gas and transporting the gas. You may have some inflationary factors but you certainly don't have a commodity play on it so it's a very interesting model.

That caught my attention because of the risk of natural gas as a fuel for -- as a fuel source going higher in the future. Final question, more of a financial one, how much does the switch to a five-year stack impact the cost of electricity for the customer over the life of the system?

On the customer end, they're not going to see much difference, because what we're really doing inmost cases is putting in place a five-year service agreement so for us it's an opportunity to improve what the margins look like on our service business. What we've done with the service agreements is really to make sure the end user customer didn't take any kind of technology risk by adopting FuelCells. So it's really a chance for us to continue to improve what our own economics look like on the service business.

Okay. So putting it that way, how much of a difference, percentage-wise, is it a simple sort of five on three ratio, or --

It it's pretty close to the, because the biggest factor in our operating maintenance cost is that stack replacement. So if you go to five years from three, you get a pretty close to a corresponding improvement in terms of what you'll see on the service margins.

Great. Thanks very much.

You're welcome.

(OPERATOR INSTRUCTIONS). We'll take our next question from Anthony Riley with RBC Capital Markets.

Hi, good morning.

Good morning.

Question on your balance sheet. You have $81.9 million in cash and cash equivalents. Can you kind of break out what that's actually invested in, in light of -- we've seen some of these auction rate security markets implode recently. Do you guys have any exposure to that?

No, our policy is extremely conservative. It's basically either money market that invest in U.S. treasuries or U.S. treasuries -- our investment policy is absolutely backed by the United States Government at this point. So we actually have the 81 in cash and the 54 in investments in the short-term it category, then you have the investments, U.S. treasury, long term all in those types of instruments.

Thanks for clarifying that.

Yep.

Second quick question, Op Ex, can you kind of talk about how you see that trending for the rest of the year, if you could?

CapEx?

OpEx. Operating expenses.

Operating expenses. So in effect, so are you talking about specific categories of Op Ex or the total? Are you talking below the margin line or --

No, just basic SG&A, stuff like that. How should we approach the model.

From ramping the business we don't see that as a significant impact. We've been incrementally adding some selling into our numbers as we're getting more and more opportunities to sell product we need to be able to respond to that. So we have a little bit there but nothing really significant there. R&D costs will actually come up. We're actually in this quarter transitioning from completion of some major projects that we accomplished in the fourth quarter to our -- and then transitioning to our 2008 objectives, which the major one is the power output increase. So we would expect that that number would increase over the -- more in line with where it was in the previous quarters.

Okay, thank you.

Yep.

And our next question comes from Michael Molnar with Goldman Sachs.

Good morning. If I can ask some questions on some of the rough numbers a few years out, and I fully understand it's hard to know where those might go. But let's say you get to a run rate of 150 megawatts at some point, however many years out. There's a lot of uncertainty in terms of product mix, et cetera, but if we were to assume an ASP of $2500 a kilowatt and getting down to a cost of $1800 a kilowatt, does that make sense in very rough terms or would that be way off base?

No, I think you're right on. I think we would expect 20% or better margins with that kind of volume. We would expect the product mix to actually stabilize at that point into the multimegawatt and megawatt. Most of that would be coming through the system. As we push volumes through the system we don't see a significant difference in costs between -- what it really narrows down to is that the difference in the cost between the multimegawatt is the fixed cost differential in the balance of plan. On the two-megawatt plant you're getting more power, so maybe a 10%, probably a 5 to 10% differential in the cost of that, so those should both be very opportunistic from a margin standpoint. So, no, I don't see it as way out of whack.

Okay. Just one other question on this topic. From some of the slides, the costs, your current costs are trending down to sort of a 3500 or 4,000 a kilowatt. Does that imply that your ASP is roughly around $2,000 a kilowatt? Is that kind of the right thinking?

Our ASP should be -- and I think it's fairly public information -- around $3000 a kilowatt. Certainly the Connecticut projects are $3000 a kilowatt. So it's more like $3000 a kilowatt is where we're at.

Okay, perfect. Thank you very much.

And there are no further questions at this time. I would like to turn the conference back over to our speakers for any additional or closing remarks.

I'd just like to thank everybody for participating in this morning's conference call and we look forward to speaking with you next quarter as we continue to update on our progress. Thank you, everyone.

And that concludes today's teleconference. Thank you for your participation. Have a good day.