燃料電池能源 (FCEL) 2010 Q1 法說會逐字稿

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 G.

Mahler, Senior Vice President and CFO.

The earnings press release is posted on our website, at www.fuelcellenergy.com, and a replay of this call will be posted two hours after its conclusion.

The telephone numbers for the phone replay are listed in the press release.

Before proceeding with the call, I'd 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 fuel cell technology.

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

Now we will turn the call over to Dan Brdar.

Dan?

Thank you for joining us this morning.

Clean energy is increasingly driving today's global economy.

The recent increased press coverage of fuel cells highlights the growing recognition that clean, highly-efficient, base load power generation is a critical part of the solution.

Around the world, policy makers and power producers are seeking clean, efficient, distributed power to reduce pollution, enhance their energy independence, and create green jobs.

As the world's leading manufacturer of ultra-clean, highly-efficient fuel cells, FuelCell Energy has a unique, first mover opportunity to capitalize on that demand.

FuelCell Energy is the only manufacturer of commercial megawatt class fuel cells for base load generation.

Our stationary fuel cells are proving themselves in diverse markets around the globe, from Asia to North America, where they've generated hundreds of millions of kilowatt hours of electricity.

Driven to find solutions that are available today, not tomorrow, power producers, businesses, and our governments are looking to our fuel cells to address their clean energy needs.

At the same time, our products are steadily becoming more economical to manufacture.

Our cost-reduced, megawatt class fuel cells are now in production.

These fuel cells are as versatile as ever, operating on a variety of fuels, bio gas as well as natural gas, with the highest available electrical efficiency in their size category, and with high operating availability.

With momentum in our key markets and a robust growing project pipeline, policy initiatives and rebounding credit markets will help convert this pipeline into orders.

I'll say more about our company and markets after Joe Mahler, our Chief Financial Officer, reviews the financials for the quarter.

Joe?

Thank you, Dan, and good morning, everyone.

FuelCell Energy reported total revenues for the first quarter 2010 of $14.6 million, compared to $21.7 million in the same period last year.

Product sales and revenues in the first quarter were $12.8 million, compared to $19 million in the prior year quarter.

Overall product revenue was driven by the product mix changing from power plants in the prior year, to primarily stacked modules in the current period.

The Company's product sales backlog, including long-term service agreements, totalled $84.1 million as of January 31, 2010, compared to $70.9 million as of January 31, 2009 and $90.7 million as of October 31, 2009.

Product margins improved over the prior quarter by $4.7 million, driven by sales of lower cost, megawatt-class modules.

The product cost-to-revenue ratio improved 7% to 141 to 1 in the first quarter, compared to 152 to 1 in the first quarter of 2009.

The ratio was negatively impacted by commissioning-related costs in South Korea and lower sales.

Research and development contract revenue was $1.8 million, compared to $2.7 million in the prior year quarter.

Research and development revenue declined, due to completion of the Company's Vision 21 and Ship Service Fuel Cell contracts with the US Department of Energy and the Navy.

The company's research and development backlog totalled $11.9 million as of January 31, compared to $23.1 million as of January 31, 2009, and $14.2 million as of October 31, 2009.

The Air Products contract we announced this morning will add to that backlog.

Net loss to common shareholders for the first quarter of 2010 of $15.4 million, or $0.18 per basic and diluted shared, improved 26%, compared to the prior year quarter net loss to common shareholders of $20.7 million, or $0.30 per basic and diluted share in the first quarter of 2009.

This improvement was due to sales of higher margin products and company-wide cost reductions.

Total cash and investments in US treasuries were $57.6 million as of January 31, 2010.

Net cash use for the first fiscal quarter was $7.2 million, compared to $23.2 million in the fourth quarter of 2009.

Net cash use improved over the prior quarter, from increased customer milestone payments, as FuelCell Energy completed commissioning of a number of power plants in South Korea.

We continue to see cash use in the $10 million to $12 million range, plus or minus working capital timing per quarter.

Capital spending for the 2010 first quarter was approximately $600,000, and depreciation expense for the period was $1.9 million.

Before I close, let me spend a couple of minutes discussing the results of the quarter, focusing on sales margins and cost ratio.

Starting with sales, there were two primary drivers to the lower reported sales.

We recorded sales for the same amount of megawatts produced in the current and prior quarters, but the sales value was lower, as we shifted from complete power plants to modules to support POSCO power.

With approximately one third less sales value for modules, you can get to the reported sales in the quarter compared to the prior year.

The second driver remains slow North American Sales.

Our expectation is that California, Connecticut and Canada should be driving growth.

The completion of the loan guarantee process for 23 -- for 27.3 megawatts, which has a potential project value over $135 million, should begin to clarify the order pipeline.

At the same time, we see progress on the partnering financing front in California, and continued progress on the regulatory front in Canada, all of which should enable order flow in 2010.

Our backlog remained strong at 38 megawatts, or $84 million, and we expect POSCO Power to also add to backlog in 2010, as they place their next order to support their production in the Korean market.

Dan will speak more to the markets in his comments.

Moving to margin and the cost ratio.

Margins improved by $4.7 million over Q1 2009, driven primarily by lower manufactured product costs, which is a good result.

The margins in the quarter were negatively impacted by the remaining Korean commissioning costs, which are now resolved.

How the cost ratio reacts is interesting.

We use the cost ratio to give period-over-period comparison, but the mechanism can sometimes not fully capture the results.

In a period of lower sales like this quarter, the impact of items like the commissioning cost can be magnified.

For demonstration purposes, if you had revenue from complete power plants in the quarter instead of modules, the ratio would move 10 basis points lower, with the same below-the-line cost structure.

The conclusion I draw is that our manufactured costs of modules and power plants are on target.

With our costs in line, we are focused on driving volume to enable profitability.

Dan?

Thank you, Joe.

In 2009, FuelCell Energy achieved important milestones that position us solidly for future growth.

During 2010, we'll build on our success, continuing on our path to profitability, by aggressively driving down costs, and increasing order flow in our key markets.

We're focused on converting our project pipeline into backlog.

Government initiatives and loosening credit markets are increasingly supporting these efforts.

With our products generating clean energy in geographic markets like South Korea, California, Connecticut and Canada, we're beginning to expand in key vertical markets, grid support, gas distribution pipelines and bio gas wastewater applications.

We'll expand geographically as well, forging new partner relationships in Europe.

During 2009, we succeeded in putting our new cost-reduced megawatt class products into production.

Since the commercialization of our megawatt class products, we reduced the unit cost of those products by more than 60%, reflecting our steadily improving cost-to-revenue ratio.

Our new 2.8 megawatt power plant is currently going through operational and third party certification testing, and the first units will soon be deployed to customer sites.

As production volume increases, further cost reduction will be achieved through expanded global sourcing, higher volume purchasing, more competition among suppliers and increased capacity utilization in our facilities.

Last year, we received orders for more megawatts of products than in any prior year in our history.

Nonetheless, tight credit in North America slowed financing for capital projects of all kinds, including power projects.

We continue to see evidence of improvements in the availability and terms of commercial project financing.

Multiple project finance entities are actively engaged with us, investing their time and money analyzing our projects, and we're also working with our customers and distribution partners to help them secure commercial financing.

Looking at our key markets, South Korea's low carbon, green tech energy policy continues to drive fuel cell adoption in this part of Asia.

It appears likely that the government of South Korea will enact an ambitious renewable portfolio standard, or RPS.

The RPS successfully passed through the Knowledge Economy Committee of the National Assembly in February, and is expected to be acted into law by the full National Assembly.

The RPS will require electric power to be generated using clean energy technologies, and will include stationary fuel cells operating on national gas -- natural gas.

The requirement will increase each year to 4.3% of the installed capacity by 2015, and fully 10% by 2022.

This equates to approximately 2,800 megawatts and 7,000 megawatts respectively.

The program, as submitted to the National Assembly, includes incentives for 2011 participants, which we expect will drive 2010 orders.

Due to their rapid rate of growth, Asian economies like South Korea's, are experiencing a rising demand for energy to support their growing economies.

Most of their fuel is imported and expensive, and their solar and wind profiles are limited.

This drives them to find highly efficient, cost-effective solutions that operate continuously.

Our fuel cells fill this need.

During 2009, we concluded a long-term licensing agreement with POSCO Power, our partner in South Korea, enabling them to manufacture, test and condition fuel cell stat modules, using components supplied by FuelCell Energy.

We're working closely with POSCO Power, as they build their new fuel cell module facility next to their balance of plant facility in Pohang.

The expansion is expected to be completed in the fall.

Our evolving partnership with POSCO Power provides domestic content that supports South Korea's energy policies, increases orders for components we manufacture in the US, and allows us to further reduce the cost of our products for the Asian market.

During the last two years, POSCO Power has ordered 69 megawatts of our products, primarily for our multi-megawatt FuelCell power plants.

More than 24 megawatts of FuelCell Energy power plants are now operating in South Korea, including our first six 2.4 megawatt DFC3000 power plants.

These feed the electrical grid, supplementing the energy produced by traditional central power plants.

At several locations, by-product heat provides heating and cooling for nearby buildings.

These installations show the role fuel cells can play for utilities, meeting grid support, fulfilling RPS goals, and building out a smart grid using clean distributed generation.

Here in North America, we're witnessing a growing appreciation for the economic and environmental value of stationary fuel cells.

More and more, energy efficiency is being viewed as a practical, cost-effective way to reduce carbon emissions and conserve finite resources.

Reserves of natural gas, our cleanest fossil fuel, are currently estimated at 100 years, at the current rate of consumption.

By using more efficient generators, like our power plants, the available life of that resource can be extended.

As a result of expanded domestic gas production, natural gas is playing an increasingly important role in federal policy.

Last week, Senators Graham, Kerry and Leiberman proposed energy legislation that incorporates new incentives for a variety of clean energy sources, including natural gas.

The bill is intended to achieve cleaner air, create jobs, and further our energy independence.

The Senators believe the initiative will have broad appeal to both liberals and conservatives alike.

California continues to be a leader in clean energy generation.

It extended its self-generation incentive program through 2015.

Under this program, qualifying fuel cell projects are up to three megawatts are eligible for incentives of up to $4500 per kilowatt when operating on bio gas, and up to $2500 per kilowatt on natural gas.

There's about $200 million in the program at this time, and ongoing funding is expected to be roughly $83 million annually.

Many projects in our California pipeline are wastewater treatment facilities.

Faced with declining tax revenues, municipalities have been forced to review capital expenditures carefully.

So the extension of the self-generation incentive program offers municipalities a power incentive to move forward with fuel cell energy projects that would help them reduce their energy costs.

The city of Tulare in California is using our fuel cells to generate power for its wastewater treatment facility.

During the first quarter, the city purchased a fourth DFC300 fuel cell unit that will upgrade the facility's fuel cell power output to roughly a megawatt, or more than 40% of the electricity needed to run the wasterwater treatment operation.

Our fuel cells are especially well suited for wastewater treatment facilities, food and beverage processing plants, and similar combined heat and power applications.

In the process of generating electricity, our fuel cells produce high quality heat as a by-product, and they operate on a wide variety of fuels, including bio gas.

The heat produced by our fuel cells is used in a wastewater treatment facility's anaerobic digester, while the bio gas produced by the digester is used in the fuel cell to produce electricity.

Systems like this can deliver an overall efficiency of 90%, and reduce energy costs substantially.

California lawmakers are attempting to promote clean energy projects with feed-in tariffs, that would enable power producers to export excess electricity back to the grid.

A feed-in tariff for power plants using renewable fuels was enacted last October, and the California Public Utility Commission is working to set pricing with utilities and other regulators.

Another feed-in tariff, for combined heat and power applications, was also signed by the governor, and is expected to be implemented after the renewable feed-in tariff.

While the feed-in tariffs go through the implementation process, we expect that the credit will return to the market, and the SGIP and federal investment tax credit will provide an attractive incentive to customers, just as they did prior to the credit crisis.

In addition, we're working with California utilities to implement a fuel cell purchase program where utilities would buy our fuel cells, and sell the power to their customers.

Although this initiative is in its early stages, it has tremendous potential.

Our pipeline of projects in Connecticut will benefit from improving credit markets and government programs.

To date, Connecticut's Department of Public Utility Control has approved 43.5 megawatts of fuel cell projects, under the state's renewable portfolio standard.

We submitted applications for these projects to the Department of Energy's $6 billion loan guarantee program.

We received official notice from DOE that over 27 megawatts of the projects received Phase One approval.

We're now preparing material for the Phase Two applications, which we'll be submitting in the next couple of weeks.

We'll keep you apprised of our progress.

In a parallel effort, we're also working closely with commercial lenders, for both individual projects and the entire Connecticut project portfolio.

In February, Connecticut Senator Chris Dodd proposed two initiatives that could significantly expand the stationary fuel cell market.

Senator Dodd proposed that $100 million be allocated to the 2005 Energy Policy Act, to enable federal agencies to purchase fuel cells.

He's also planning to propose legislation to increase the federal investment tax credit from 30% to 40%, up to $3500 per kilowatt, for fuel cells in combined heat and power applications.

Fuel cell energy power plants provide increased power reliability, improved energy security, and energy independence.

The resulting demand for fuel cell power plants can drive increased US manufacturing and create new jobs.

A tax credit was, in part, responsible for attracting financers to fuel cell projects initially, and an ITC increase will help projects in our pipeline.

In Canada, we're working in conjunction with our partner, Enbridge, to develop the large natural gas pipeline market.

The government of Ontario ruled in September that gas distribution companies, such as Enbridge, may own and operate power plants that generate both electricity and heat , including fuel cells, operating on natural gas, up to 10 megawatts per facility.

We expect that the Ontario government will implement a revised feed-in tariff, to encourage the installation of clean energy generation for fuel cells operating on natural gas.

Enbridge conducted assessment of the gas distribution system in Toronto, Northeastern US, and California, and identified 250 to 350 megawatts of opportunities for joint projects.

Currently, they are negotiating with the Canadian government for funds from the Green Infrastructure Fund to support 47 megawatts of DFC-ERG projects on their system in Toronto.

The $1 billion Green Infrastructure Fund is part of Canada's economic stimulus plan, similar to our American Recovery and Reinvestment Act, to create green jobs by making investments in the country's infrastructure.

The decision on the amount of funding is expected subsequent to passage of Canada's 2010 budget in the second quarter.

In support of these efforts and DFC-ERG opportunities under development in the US, this morning we announced the operating results of our first DFC-ERG pipeline power plant.

The operating assessment was done by an independent third party, who conducted an in-depth assessment of the unit operating at Enbridge's facility in Toronto.

The report will be published later this year.

But it concludes that the DFC-ERG achieved an average electrical efficiency of 62.5%, and at times achieved over 70% efficiency under certain operating conditions.

This level of electrical efficiency sets a new benchmark in the power generation industry, and demonstrates the ability of the DFC-ERG to significantly reduce fuel costs and carbon emissions.

Europe is another exciting market opportunity for us.

Our license agreement with our former European partner concluded in December, and we're in discussions with potential new partners.

Because Europe is a highly diverse market, in terms of energy demand and policy, we envision working with multiple partners.

As we evaluate prospective partners, we are crafting a strategy that will consider Europe as a whole.

Depending on the circumstances, we may partner with the distributors, or form value-added reseller relationships like we have with POSCO Power.

Fuel cells were developed with support from the Department of Energy, and our work with the government continues to be fruitful.

In 2009, we received multiple contracts from the Department of Energy and Department of Defense.

In February, we were awarded $2.1 million from Air Products and Chemicals and the Department of Energy, to demonstrate our DFCH 2 and a state of the art refueling station at the Orange County Sanitation's wastewater treatment facility in California.

The DFCH 2 combines our DFC 300 fuel cell power plant, with an Air Products and Chemicals gas separation system, to produce electricity and heat, while coproducing pure hydrogen that can be used for transportation, utility and industrial purposes.

In this demonstration project, our DFCH 2 will use bio gas from the wastewater facility to generate 300 kilowatts of power.

The system also produces usable heat for the facility, and efficiently coproduces up to 300 pounds of hydrogen per day, enough to support a fleet of over 100 fuel cell cars.

While we're working under a $30.2 million DOE contract for Phase Two of a 10 year program, dedicated to developing megawatt class, coal-based, solid oxide fuel cell power plants.

As many of you know, we have a 39% ownership interest in Versa Power Systems, a pioneer is solid oxide fuel cell development.

Recent press coverage has brought a lot of attention to this part of our business.

Together with Versa, our team has met all of its DOE milestones for technical performance and cost, and is currently working on a scale up of the technology to 25 kilowatts.

The full scale model we're developing will be 300 kilowatts, incorporating a number of smaller units.

This technology is important, because it has the potential to use one of our most abundant domestic resources, coal, more efficiently and cleanly than any other power generation technology available today.

There is a growing commercial and government awareness of the role and value of fuel cells for distributing generation.

Because they're clean and quiet, highly efficient, and produce power continuously, without the space requirements of solar and wind, our stationary fuel cells can be installed almost anywhere electrical is needed.

They eliminate the need for costly and inefficient transmission infrastructure, add reliability to the grid, and reduce congestion.

Fuel cells also enable the evolving smart grid, which requires both smart metering and distributed energy sources.

Today, FuelCell Energy's unique value proposition is more compelling and timely than ever.

Operator, at this time, we'll take questions from our

(Operator Instructions)

Our first question is from the line of Burt Chao of Simmons and Company.

Thanks for taking the question, guys.

Congratulations on the results and cost reduction.

Thank you.

First quick question.

The product mix obviously shifted this quarter, because you were selling components as opposed to full systems, because of the growth of the POSCO orders.

Going forward, what's a good way for us to think about the model that, from the standpoint of modeling revenue, is it going to be pretty consistent?

Is there a forecast you can provide about mix, or is it kind of going to be lumpy, depending on when those orders are actually going to be realized, out of back log?

It's going to be a little bit lumpy, but what you're going to see is we're currently in an environment where, because of the impact, particularly last year, of the credit crisis, what's coming through the P & L, in terms of what we're making, shows that there's a hole, in terms of the order flow, that we had last year for North America.

Because, remember, our lead time to produce equipment is -- it's about 10 months.

As we're seeing the credit markets improve, and as we're progressing through things like the DOE loan guarantee, you'll see that mix become more balanced, as we start to add US order flow, and then eventually European order flow as well, back into the mix.

So what you're seeing right now -- and you'll see also probably for the next quarter -- is a bit of an unbalance towards what we're making for POSCO, but we would expect longer term that to start to move more to a 50 50 kind of mix.

Okay.

Great.

And then, also, on the cost ratio, despite the charges you had to take with the commissioning, absent those charges, do you have -- can you provide, kind of, what that number might have been, absent, you know, the one time charges?

Let me break down -- this is Joe Mahler.

Let me break down the cost ratio for you.

There's really the product cost side.

Product cost included the commissioning cost, they include warranty costs, and then below that line is actually service costs that come through.

So we support service costs.

As I've said in past quarters, service costs right now is supporting our end-of-life stacks, the three year stacks that are coming through the cycle.

We expect to continue to do that in 2011, a little bit of 2012.

That probably adds somewhere in the 20 plus cost -- 20 plus basis points to the cost ratio, and then you have, in this quarter, the commissioning costs and the commissioning costs probably added somewhere in a 10 to 13 point range.

Okay.

That's what it's looking like.

You know, obviously, volume would help us too.

I tried to talk to volume in the beginning of the call, so if you added a little bit of volume to the equation, that would move the cost ratio.

So, I think in the last quarter, we talked about where are we trying to get to by the end of the year?

We're trying to get into the 120 to130 range.

We think some volume will take care of that.

Right, okay.

But to get to a -- okay.

And then that is on target.

If you get to the 120, 130 range and you kind of stay on target to get that positive EBITDA by 2011.

You need volume to get there.

So you just need to push -- we're very clearly now -- the units that we're manufacturing can be profitable, you know, we're on the track.

We need volume.

You can really just jump on the model, if you get volume in here, and then you can get to the profitability targets.

In the 10-K, we talked to the -- around 100 megawatts of through put, and this company is profitable.

Okay, great.

And then, one last quick question.

With natural gas prices, if that's the shale plays in the US -- natural gas prices, depending on who you ask, at least in the short term, are going to be somewhat in this kind of depressed level that we're looking at.

For other traditional renewable energies, like wind and solar, that's obviously a big impediment, if you're looking at a grid parity type scenario.

How do you guys think about traditional energy and traditional energy prices, in relation to the adoption of fuel cells, given that it's not widespread commercialed option just yet.

But you are getting more to a point where more people are going to be thinking about it in just pure dollars and cents.

There's two pieces to that.

One is, because we now have a much more abundant supply than we thought we did a couple of years ago, what has happened is, the volatility that we've seen in past years seems to be quieting down.

And volatility tends to be an issue with commercial industrial customers, because they're not good at predicting what the long term pricing looks like, so is it a risk that they figure they have to manage somehow, if they want to do distributed generation.

That concern seems to be disappearing, because everybody's becoming increasingly convinced that, because there's a surplus of supply, prices are going to remain low for an extended period of time, which is a good thing.

What it does in the near term is, it actually reduces the cost of electricity for generation from our units.

So the gap that had existed previously, between us and other sources, actually becomes compressed, because you don't see the utilities rapidly dropping their pricing.

Because most of them have long-term supply agreements, it takes quite a while for that to show up.

So what we're seeing is customers are now looking at our projects running on natural gas, see a more attractive economic proposition, just because of what's happened to gas pricing over the last year.

So I think it's actually interesting for us from a competitive standpoint.

Because when we look at our pipe line, you know, much of our pipe line, particularly in places like Californi, was over overwhelmingly dominated by bio gas a year ago.

We're seeing a return of a lot interest on natural gas based projects as well.

So we're seeing more balance in terms of those two types of applications, because of the abundance and pricing of gas.

Okay.

Great.

Well, thanks so much, guys and again, congratulations.

Thank you.

Thank you, sir.

Our next question is from the line of Sanjay Shrestha of Lazard Capital Markets.

Great.

Thank you.

Good morning, guys.

A lot of great progress on a lot of different fronts.

First question on this, you know, sort of the hybrid power plant 60 plus percent electrical efficiency.

Those are some pretty amazing numbers.

Can you talk about what sort of reception are you guys seeing, and how big could that translate into your sales pipeline, because even the best combined cycle gas turbine doesn't even get nearly close to that?

It's actually potentially a real game changer for us, and for the part of the industry that we're really working here, for a couple of reasons.

One is, you've got gas distribution networks all over the world, and it's a product that could be applied in any of those marketplaces.

So it really is a global opportunity.

The other significant piece of this is, it actually allows the gas distribution companies to enter the power generation market, which they couldn't do otherwise, because here, they're actually putting a power generator on their own facilities to improve the operability of the gas distribution system.

So getting the report out in terms of how this first unit is operated, certainly has been a driver of what Enbridge has been doing working with the government, because they see the value it will bring to their system.

And I think that will just drive more adoption in the marketplace.

I think you guys did mention a number as the potential opportunity in Ontario.

I'm sorry, I didn't quite get that.

What was that number again, as to how big -- 43 megawatt or something like that?

There's 47 megawatts that Enbridge has submitted to the Canadian government in their Toronto facility.

There's actually more megawatts than that, that's available in their system, but they've identified the first 47 that they're using as an opportunity to actually get some of the stimulus dollars from the Canadian budget, and actually address some of their needs in their gas distribution system.

One follow-up question on that, because I think that -- So, what kind of the electricity price is sort of assumed in that -- sort of the proposal, if you would.

Then we can kind of back out, as to -- based on the efficiency and assumption on the price of gas, what the system clearing price for you guys could be.

In terms of the -- are you talking about dollars for kilowatt, or --

Either.

Dollars per kilowatt or dollars per kilowatt hour.

We can get to either, once we have one.

You're going to see this looks similar, in terms of what our pricing is in the marketplace.

It's going to be in the $3,000 to $3,400 a kilowatt.

Okay.

Perfect.

So, couple more follow ups, guys, if I may.

So, in terms of this Phase One from DOE for the Connecticut, it's about time.

So when you talk about PhaseTwo, what exactly does that entail?

Do you need to have an equity sponsor for the 20% of, the sort of the funding, before you get into Phase Two?

Or, help us understand that, as to how does that whole process evolve?

Because once you get that, you know, I mean, DOE stuff, it would make the project that much more attractive and the returns even goes up a lot.

Yes, I would agree.

What Phase Two involves is, you need an independent engineering report.

Okay.

You need an environmental assessment of the project, and you need a credit rating for the project.

You don't have to have the equity pieces lined up to do that.

It's really -- they structured this in two pieces so that the participants weren't spending dollars to get independent assessments and environmental reports, until they knew they were actually going to have a chance of success.

So, in the next couple of weeks, we'll be submitting for the projects that have met the Phase One approval, that engineering assessment, environmental assessment and credit rating.

And then after that, they'll make a decision, they've indicated, within 60 to 90 days.

They've been pretty good at keeping their schedule.

And at that point, you sit down and negotiate a term sheet with them.

Okay.

Then one last question for me, guys.

In that backlog, you said there is no lumpiness going forward.

What would be the mix of system versus stack, in that backlog number that you guys have provided.

Maybe it's more for Joe.

In the -- Sanjay, in the current backlog?

Correct.

Yes.

Most of it at this point would be modules.

Okay.

And the modules are all related to POSCO.

Terrific.

Thanks a lot, guys.

Thank you.

Our next question in queue is from the line of Meghan Moreland of Ardour Capital.

Good morning.

Morning.

I was under the impression that most of the costs related to the commissioning in South Korea were already absorbed in the fourth quarter, but obviously some has leaked into this quarter.

You mentioned that it was all done.

Is that for sure or are we also going to see some -- you know, some of these costs leaking into the second quarter?

No, it's all behind us.

What you've got is, the units actually went into operation last quarter, and these are just trailing costs that come through.

If you think about having to replace, for example, some of the electrical components, some are a little bit longer lead items, so by the time they're ordered, installed, then there's a billing cycle behind that.

So it's just trailing costs.

That's all it is.

So we could expect to see an improvement in gross margin in the second quarter over the first quarter?.

Yes, you would.

I don't know if you already mentioned this, but can you give us an update on the ASP per megawatt, now that we're moving from whole systems to modules to stacks?

Well, the modules represent about two thirds of the cost of our large power plant.

ASP in the marketplace for a large power plant is about $3,000 a kilowatt, sometimes a little bit more, depending on marketplace.

So the modules really represent about two thirds of that ASP.

And then, could you just give some color on yesterday's announcement regarding PG & E and SCE in California trying to have fuel cells for utility cells.

We've actually been working with the utilities for quite awhile, as part of helping them assess that have been identified, at a whole variety of sites, where the utilities would own the units at a customer site.

They're typically using colleges and universities as the host, because they typically also have a good steam load for combined heat and power applications.

The utilities have submitted their proposals to the Public Utility Commission.

And I think what we saw, in some of the proceedings, is there was some objection to some of the costs the utilities were adding as part of their own contingency, that significantly increased the cost of some of those.

So what we saw was really a split decision between Michael Peavey, the head of the Public Utility Commission and the administrative law judge.

And they're working through how do they address that, I suspect, before it's all said and done.

They will have the utilities take some of their contingency out, in order for these projects to move forward.

But for us, it's a good sign, because we've been working with them for awhile, to get them to understand the benefit that fuel cells can bring to their system.

And it looks like they are becoming increasingly convinced that it's really worth them getting some units in, understanding first-hand how they operate, as part of their own assessment of where do fuel cells fit in their product mix.

So, they were essentially adding about $4 million per megawatt in additional costs?

Over your $3 million per megawatt figure for a whole system?

They added quite a bit.

Remember, utilities are not paid to take risks.

Their view is, this is something we've never done before.

We want a lot of contingency.

I think they're also planning a fair amount of activity around it, in terms of media and press events, and just sort of public information disclosure, which I think adds to their numbers as well.

Okay.

Then the 27 megawatts that have passed the first round of the DOE loan guarantee program, that's something you're pushing forward on your own it seems like.

Once you get approval, is that something you're going to, kind of, spin off to another developer, or is this something you're going to go forward with and develop on your own?

It's really a mix.

The projects have other partners that are involved in them, and once we understand what the final terms surrounding the -- those projects look like, because you have to negotiate a term sheet, we may turn them over to our partners.

We may do them ourselves.

It's really afunction of what's the level of loan guarantee that's provided.

And, what's been the hold up here?

Obviously, financing has been difficult.

But, also, I don't think any PPAs have been signed for any of the projects.

Has that been the catch 22, getting the PPAs signed?

Why has that not been signed?

Because it's been over a year since a lot of these were originally approved.

The PPAs for all the projects are signed.

They are.

Are truly, complete, ready to go looking for financing.

The delay really has just been the delay in credit markets in general.

And on the DOE side, it's taken them awhile, largely because they have just been inundated with project requests of people that are looking to tap into that loan guarantee program.

Lastly, you know, the announcement regarding the ERG is obviously very positive, but this has still been a relatively small segment for you.

Can you give us any kind of color on where this is going to go this year, or if this is really going to get you on your way, the announcement of the efficiencies?

Well, I think it's important in terms of raising the visibility of it.

But if you at what we're actively working in the pipeline, you've got four projects in the Connecticut activity that total probably close to 20 megawatts, that are all the same product design, a fuel cell coupled with a turboexpander.

You've got Enbridge pursuing 47 megawatts on their own system, with the Canadian government.

And you've got other utilities that Enbridge is working with to help educate them about the product as well.

So it's looking like it's becoming increasingly a pretty significant part of the pipeline that we've got,.

So getting the results of this out and published was something that both we and Enbridge thought was pretty important at this point in time.

Thank you.

Thank you, ma'am.

Our next question is from the line of John Quealy of Canaccord Adams.

Hi.

Good morning, guys, this is Mark Sigal for John.

I was wondering if you could jsut expand upon some of your comments you talked about, regarding new European partnerships moving forward and what the time table might look like there.

What we've found is, to find good partners takes time and it takes a while for the parties to get to know each other, to actually spend time working together, seeing our units, seeing our factory.

We're in discussions actually now with multiple players.

This is one of the those things that, we want to make sure that we pick the right partner.

Because if you look at what we've done, for example, with POSCO, it's an indication of, if you get the right partner, it can really drive a lot of business for us.

Timing is really a function of how quickly we can get some of our potential partners to move.

They are tending to be larger companies that are going to move slowly.

They do a lot of due diligence, and their approval process tends to be lengthy.

But we're pretty optimistic that, as we get a little bit further here in the year, we're going to have certainly one and, hopefully multiple, pretty good European partners lined up.

Okay, great.

And then just turning to the Connecticut megawatts that are not included in the DOE loan program process.

What's your expectations there, perhaps from a commercial financing standpoint.

of timing there?

Are you still targeting something in fiscal '10 to develop, or is that more fiscal '11?

Yes, we continue to work the commercial financing side.

Getting the loan guarantee is certainly a very good thing.

We continue to work the process on it.

We fully expect to get these projects financed.

We're seeing some projects in the commercial financing markets.

We're starting to see some players out of wind and solar, as those markets decline a little bit, get very interested in the fuel cell markets.

So we're hoping later in the year, 2010, our initial focus is really on loan guarantee.

If wedo have a parallel process, then we would expect over the next several months to move those forward.

Okay, great.

My last question is, how do we think about commissioning costs, I guess moving forward?

Will those be lumpy or perhaps more linear, just, you know, for modeling purposes, how do we think of that?

Well, what we've seen herein the last couple of quarters really is a one-time event.

It represented basically getting multiple units conditioned at the same time, that actually had some unique challenges, because we had basically a new product in country with new partners they hadn't seen before, and we had some issues with some of the electrical equipment that surrounded the fuel cell.

So, what we've seen here the last couple of quarters is not something that we expect to see repeated going forward.

All right.

That's very helpful.

Thanks a lot.

Thank you.

Our final question is from the line of John Roy of Janney Montgomery Scott.

Guys, can you hear me?

Yes,wecan .

So really, you've answered a lot of questions and things are going pretty well.

I guess the real question, what we're trying to assess, is that when you look at the preponderance of the opportunities, what do you think is going to be the bulk of your business for 2010, in terms of the actual numbers?

What is really going to be the thrust?

What's going to make it get going?

Well, I think the markets in general are going to get going as we experience some of this project financing reaching fruition.

We've seen it in terms of what's happening in California.

We've certainly seen it in Connecticut.

As we get through either the loan guarantee process or the commercial financing, the pipeline there that's ready to move forward is looking increasingly like one that's eager to move.

So we really want to just get through the last of this credit issue that seems to be lingering, I think, longer than everybody would like.

Because the projects themselves are actually pretty far alon, in terms of their state of development and the customers' ability to move forward.

Once you get approval, I guess the next question is, how long until you would start seeing possible changes in either your production capacity or plans, based on those or actual numbers?

Because I know obvious obviously it takes a long time for these things to get out the door.

Our delivery cycle is about 10 months or so.

Once we see things going into backlog, and as we get good visibility into those, we'll adjust the production run rate to respond to that.

Because if you look some markets, like California, for example, they're actually time -bound, based under the self-generation incentive program, on when they actually have to have their units in and operational.

So we're going to let the market drive what that production rate needs to be.

And if I remember correctly, you can ramp up fairly quick, if you need to do capacity without a whole lot of CapEx?.

We can.

In fact, there's actually capacity there that can do up to 70 megawatts.

So, for us, it's really just a matter of bringing people on to ramp the capacity up.

Great.

Good going, guys.

Thank you very much.

Thank you.

I'm showing no further questions in queue at this time.

Well, I want to thank everybody for joining us, and we look forward to speaking with you again next quarter to update you on how we're doing in the marketplace.

Thank you, everyone.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program.

You may now disconnect.

Everyone have a good afternoon.

Thank you.