燃料電池能源 (FCEL) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the FuelCell Energy reports third quarter 2010 results conference call.

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

Later we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions).

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Kurt Goddard, Vice President of Investor Relations.

Good morning and welcome to the third quarter earnings call for FuelCell Energy.

Delivering remarks today will be R.

Daniel Brdar, Chairman and Chief Executive Officer, and Joseph G.

Mahler, Senior Vice President and Chief Financial Officer.

The earnings 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 are listed in the press release.

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

I would like to direct listeners to read the Company's cautionary statement on forward-looking information and other risk factors in our filings with the US Securities and Exchange Commission.

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

Dan?

Thank you, Kurt.

Thank you for joining us this morning.

Policy makers, power producers and energy consumers world wide are turning to fuel cells because their unique attributes allow them to solve acute energy, environmental and business problems that other technologies cannot.

Our fuel cell technology helps South Korea achieve their low carbon, green energy goals, allows agricultural and municipal customers to transform waste problems into renewable energy solutions and generates reliable secure power for commercial and government facilities.

We are the world's only manufacturer of commercial megawatt class fuel cells for baseload power generation.

Our products are a preferred energy solution because they use a variety of fuels like renewable biogas or plentiful natural gas to generate ultra clean baseload electric power where it is needed.

They do this more cleanly, quietly and efficiently than combustion based technologies, and they produce power continuously, unlike wind and solar.

Beginning in 2012, South Korea's renewable portfolio standard mandates close to 6,000 megawatts of additional renewable energy over the next decade.

PASCO Power, our partner in South Korea, is expanding their facilities and we expect to capture a large share of this market.

In the US, the problem solving abilities of fuel cells, government incentives and loosening credit markets contribute to expansion in key vertical markets and multiple orders.

We received three orders totaling 3.4 megawatts in the third quarter followed by three more orders in August totaling 2.6 megawatts for a total of 6 megawatts of product for commercial, government and utility projects.

These actions point to increasing order volume in the near term, as projects in our growing sales pipeline move to closure and we're taking steps now to prepare for producing higher volumes of our product.

I'll get into more detail about our results after Joe Mahler, our Chief Financial Officer, reviews the financials for the quarter.

Joe?

Thank you, Dan.

Good morning, everyone.

FuelCell Energy reported total revenues for the third quarter of 2010 of $18.9 million compared to $23 million in the same period last year.

Product sales and revenue in the third quarter were $16.2 million compared to $18.7 million in the prior year quarter and $13 million for the second quarter of 2010.

Revenues increased over the second quarter on US order flow.

The Company's product sales backlog, including long-term service agreements, totaled $79.8 million as of July 31, 2010, compared to $104.8 million as of July 31, 2009, and $75.5 million as of April 30, 2010.

Orders received to date in the fourth quarter of 2010 will add $13.1 million to product revenue backlog.

Product margins measured on a dollar basis improved over the prior year quarter by $3.7 million, driven by sales of higher margin megawatt class modules.

The product cost to revenue ratio was 1.24 to 1 in the third quarter compared to 1.4 in the third quarter of 2009 and 1.47 in the second quarter of 2010.

This improvement in the cost profile reflects continuing success in reducing product and manufacturing costs while enhancing the technology.

Research and development contract revenue was $2.7 million for the third quarter of 2010 compared to $4.3 million for the third quarter of 2009.

The Company's research and development backlog totaled $7.4 million as of July 31, 2010, compared to $15.3 million as of July 31, 2009, and $9.9 million as of April 30, 2010.

The Company has a number of DOE research and development awards worth about $5 million in contract negotiations, and is currently proposing Phase III of the SECA solid oxide contract to DOE with an estimated total value of approximately $30 million.

Total cash and investments in US treasuries were $67.8 million as of July 31, 2010.

Net cash used for the third quarter was $8 million excluding net proceeds of $32.1 million from the public offering of common stock.

Net cash used for the second quarter of 2010, for comparison purposes, was $13.8 million.

Cash used benefited from lower expenditures and higher receipts from new orders received in the quarter.

Capital spending for the third quarter was $300,000 and depreciation expense was $1.8 million.

For the nine months ended July 31, 2010, FuelCell Energy reported revenue of $50.1 million compared to $67.6 million for the comparable prior year period.

The product sales and revenues were $42 million compared to $57.1 million for the comparable prior year period as the sales mix shifted to fuel cell components from complete power plants.

Net loss to common shareholders for the nine months improved by $10.4 million.

The primary driver was that margins for product sales and revenue improved by $11.6 million over the prior year period due to sales of higher margin megawatt class products.

On the order and financing front, customers are telling us that their access to capital is improving, and recent orders, contracts in negotiations in our pipeline indicate this.

We are in active discussions with several parties on the Connecticut projects and also with the Department of Energy on our Phase II loan application.

We see creative financial solutions employing tax-free bonding in California as well as customers deploying their own capital to solve business problems with our fuel cells.

Our products help to solve business, economic and environmental issues and we see effort in the marketplace to get fuel cell projects done.

We are working these to closure.

Before I close, I would like to reinforce our message that we are at the inflection point where volume alone will enable Company profitability.

Our costs are on target and we are focused on closing the orders in our pipeline.

Dan?

Thank you, Joe.

As we prepare for higher production rates on our path to profitability, FuelCell Energy's business strategy is focused on driving product costs down while growing our key geographic and vertical markets.

Our cost reduction program has successfully reduced the unit cost of our megawatt class products by more than 60% and this is reflected in the improving margins in our financials.

The confluence of both policy initiatives, like the South Korean RPS, an active and growing order pipeline in the US, and expansion in key vertical markets will drive orders and higher manufacturing volumes.

In South Korea, our largest market, the RPS passed in March by the National Assembly, has created a strong market for fuel cells.

Due to the high cost of imported fuel, and the poor wind and solar profiles for the Korean peninsula, fuel cells are an excellent green energy solution for South Korea and the government has designated fuel cells as a key economic driver.

To accelerate the adoption of renewable energy alternatives, the South Korean legislature adopted a farsighted and aggressive renewable portfolio standard.

The RPS requires 350 megawatts of additional renewable energy per year through 2016 and 700 megawatts per year through 2022, a cumulative target of nearly 6,000 megawatts.

Fuel cells fully quality under the Korean RPS because they're extremely clean, highly efficient and can operate on natural gas or renewable biogas.

Our product transforms these fuels into electricity with up to twice the efficiency as conventional technologies, resulting in significantly lower greenhouse gas emissions.

Because they do not combust fuel, our fuel cells emit virtually no harmful pollutants, unlike combustion-based distributed generation.

An ideal form of distributed generation, our products are easily sited due to their small footprint, quiet operation and competitive costs compared with large conventional power plants and their associated transmission lines.

Our by-product, heat, can be used for commercial or industrial purposes in combined heat and power applications where system efficiencies can reach 90%, depending on the application.

FuelCell Energy has a major presence in this market already.

PASCO has purchased approximately 69 megawatts of our power plants and fuel cell components to date.

Our South Korean strategy is based on a long term licensing agreement with PASCO under which they assemble power plants using fuel cell components supplied by FuelCell Energy.

This strategy allows us to leverage our manufacturing capacity and capture overseas market opportunities.

PASCO built a balance-of-plant facility in Pohang and is now constructing an adjacent fuel cell module facility that is on schedule to be completed by year-end.

These facilities will have an annual capacity of 100 megawatts.

In support of this project, we are procuring fuel cell stack module assembly and conditioning equipment for PASCO.

Demonstrating its confidence in the market for fuel cell power in South Korea, and its solid commitment to our long-term partnership, PASCO has invested more than $100 million in their fuel cell facilities and business.

The South Korean RPS will drive orders as PASCO seeks to fully utilize its expanding capacity.

We are currently in discussions with PASCO on their order for 2011 deliveries and expect the details of the Korean RPS pricing mechanism to be finalized by the Korean government in the very near term.

In the US, we received two orders totaling 3.1 megawatts during the third quarter and subsequently received another three orders totaling 2.6 megawatts.

These orders demonstrate our customers' satisfaction with our products and the growing understanding that fuel cells can solve problems for utilities, agricultural operations, municipalities, food and beverage processors, military installations and other customers needing ultra clean distributed power.

California is setting the pace for clean energy policy in the US.

In April, the California Public Utility Commission authorized of 5.6 megawatts of fuel cell projects to be sited at four state universities.

These projects will be the first megawatt class utility-owned fuel cells in the US.

In May, following the Commission's decision, Pacific Gas and Electric ordered two 1.4 megawatt DFC1500 power plants for Cal State University East Bay and San Francisco State University.

These units will be operational early next year and both power plants will be configured to use the by-product heat from the fuel cells for facility and swimming pool heating.

These units will provide a first hand opportunity for a US utility to become knowledgeable about large scale stationary fuel cells and the problems they can solve for utilities.

These power plants will operate on clean natural gas which is plentiful here in North America.

Because of their low emissions, high efficiency and quiet operation, these units are an excellent example of how utilities in California and other states can use clean distributed generation to meet their clean air and greenhouse gas emission targets, enhance the reliability of their transmission and distribution systems and relieve grid congestion.

Additionally, we are in discussions regarding the installation of 2.8 megawatts of fuel cell power plants at the other two university campuses approved by the California Public Utility Commission.

In August we announced two orders for fuel cell power plants in California.

G3 Power Systems ordered a 1.4 megawatt DFC1500 to be installed at all Olivera Egg Ranch located in California.

The power plant will run on renewable biogas obtained from ranch operations and will convert a significant agricultural waste problem into clean energy solutions.

The waste from the agricultural operations emit ammonia, methane and other gases, creating acute environmental and disposal challenges.

Olivera Egg Ranch will install an anaerobic digester in which heat and micro-organisms will reduce the volume of waste and create a methane-rich biogas as a byproduct.

The power plant will utilize 100% of the methane-rich biogas and fill nearly all of the Ranch's power needs.

The byproduct heat of the fuel cells will be used by the anaerobic digester, eliminating the need for a combustion boiler.

Our fuel cells are well suited for agriculture and food and beverage processing, as proven by other installations in California, such as the Sierra Nevada Brewery and Gills Onion, a food processor.

Olivera is our first animal waste agricultural project and shows how fuel cells can be applied to solve multiple business, energy and environmental problems.

They lower the owner's power costs and insure a reliable supply of renewable power while reducing greenhouse gas emissions and virtually eliminating the emission of pollutants.

At the same time, they solve a significant waste disposal problem for the agricultural operation.

The problems associated with agricultural waste are a significant challenge in many parts of the country.

In California, dairy production alone is estimated to generate several hundred megawatts of waste each year that can be converted to ultra clean renewable energy, employing the same approach being used at Olivera Egg Ranch.

We now have multiple projects in our sales pipeline based on the same concept.

In August, Eastern Municipal Water District in Southern California ordered two 300-kilowatt DFC300 fuel cell power plants for the Paris Valley regional water reclamation facility in Riverside County.

Following Eastern Municipal's prior purchase of three DFC300 power plants in 2007 for its Marino Valley facility, this order demonstrates the customer satisfaction with our products.

These power plants will operate on renewable biogas obtained from the wastewater treatment plant in a highly efficient combined heat and power configuration typical of wastewater treatment facilities.

Our fuel cells are helping Eastern Municipal meet the stringent emission standards of the South Coast Air Quality Management District, the agency responsible for a region they would consider to be the smogiest in the country.

The use of anaerobic digesters, combined with our ultra clean fuel cells, allows Eastern Municipal and other wastewater treatment facilities to dramatically reduce the volume of waste from their facilities, and generate renewable baseload power at the same time.

As a result, we have a growing number of wastewater treatment projects in our sales pipeline moving through the closure process.

We expect wastewater in particular, and biogas applications in general, to be one of our fastest growing market segments as we become the preferred solution to help these facilities solve their waste problems and power generation needs.

In Connecticut, we've received two orders from customers demanding reliable and secure distributed energy.

In July we announced the sale of a 300-kilowatt DFC300 fuel cell power plant to Logan Energy, a dedicated fuel cell energy services company that will install the power plant at Carla's Pasta, a frozen food processing facility in South Windsor.

The plant will provide 60% of the customer's power requirements with the byproduct heat used for space heating and production processes.

The high efficiency of the fuel cell power plant lowers fuel and electric costs for Carla's Pasta while reducing the Company's carbon footprint.

Foot processing operations like Carla's Pasta need reliable power to keep their food processing and cold storage equipment operating around the clock.

In August we also announced the sale of two 300-kilowatt DFC300 fuel cell power plants also to Logan Energy to be installed at the US naval submarine base, New London, in Groton.

The primary home of the US submarine fleet, the base must have secure, highly reliable sources of energy.

The power plants will be installed near the existing energy plant and will provide baseload electricity with the byproduct heat being dedicated to the energy plant's boiler, reducing fuel costs and carbon emissions.

In addition to the US Navy, we have supplied fuel cell power plants to other branches of the US military including the Air Force and Marine Corp, helping our armed forces become more energy independent, efficient and secure.

As Joe mentioned earlier, we are in active discussions on multiple financing paths for the 43.5 megawatts of fuel cell projects approved by the Connecticut Department of Public Utility Control, including commercial financing sources and with the US Department of Energy for a loan guarantee for 27 megawatts of these projects.

While both the commercial financing and the loan guarantee process have been slow, our recent discussions on both approaches leave us optimistic about a successful outcome.

In Europe, discussions with prospective partners are progressing well.

Europe has always been a leader in green energy and is an untapped market for fuel cells.

The European continent is a very diverse marketplace geographically and politically, and we anticipate partnering with multiple entities.

We are in active negotiations with what we believe will be the first of several partnerships for the European market.

In our research and development work we are demonstrating the enormous potential of fuel cells.

Our hydrogen co-production concept, the DFC-H2, has been installed as part of a state-of-the-art hydrogen vehicle fueling station at the Orange County station's wastewater treatment facility in California.

It will start up on natural gas and then switch to biogas generated by the wastewater treatment plant, and begin co-producing hydrogen for vehicles early next year.

A truly cutting edge technology, the DFC-H2 produces not one but three integrated value streams for customers -- electric power, hydrogen for vehicles, and heat.

With our partner Versa Power Systems we have been meeting the cost and performance objectives of Phase II of a $30.2 million Department of Energy contract to develop large-scale coal-based solid oxide fuel cells.

The ultimate objective of the program is to develop megawatt class solid oxide fuel cell power plants that run on coal-derived syn gas, thereby reducing greenhouse gas emissions from coal by 90%.

The Company is currently in discussions with the DOE for the third phase of this program and expect a decision from DOE by the end of this year.

With growing momentum in our sales pipeline and order flow in our key markets, we created a Chief Operating Officer position in July.

This role will help position the Company for growth as we ramp up production and will ensure a close integration between manufacturing operations, product development, our quality initiatives, and our supply chain.

Tony Rauseo, formerly Vice President of Engineering and Chief Engineer, was appointed to fill the position.

His strong operational, manufacturing and engineering background will allow us to ensure a smooth production ramp.

Fuel cells are an ideal solution for today's energy challenges.

In many cases they're the only solution.

FuelCell Energy's stationary fuel cells are helping customers meet clean energy standards, transform waste into renewable energy and generate power cleanly, quietly, reliably and securely wherever it is needed around the world.

Fuel cells can solve future energy problems, too, co-producing hydrogen for vehicles and extracting clean energy from coal.

As a result of the ability of fuel cells to solve a diverse array of problems, we see several significant near-term catalysts for our business.

We anticipate receiving our next order from PASCO Power to support their 2011 needs, now that the South Korean RPS is being finalized.

We anticipate a successful conclusion of the next phase of the DOE loan guarantee process or third party financing for some or all of the projects approved in Connecticut.

And we expect continued order flow from California similar to our recent announcements as the remaining approved utility projects and the numerous wastewater, food and beverage processing, and agricultural waste projects in our pipeline are closed.

Increasing order flow from our target markets and a growing recognition of the ability of stationary fuel cells to solve energy and environmental problems for our customers positions us well to ramp production and move to profitability.

Operator, at this time, we'd be pleased to take questions from our listening audience.

Thank you.

(Operator Instructions).

Our first question comes from Sanjay Shrestha from Lazard Capital.

Hi, this is Sarah in for Sanjay.

Can you discuss timing on the European partnerships at this point, and comment on the natural gas pipeline opportunity and some of the relationship you have with Enbridge there.

Yes.

On the European partnership, those discussions have been moving along.

I would hope that we're going to have something done and announced by the end of the year.

We are pretty well engaged with what we believe will be our first partner.

And we have some key meetings coming up with them that we're hoping to be able to drive some agreements to closure.

So I would expect that to be an event for this year.

As it relates to the gas pipeline activity, the first significant opportunities for us here domestically are four projects that are part of the Connecticut portfolio that are based on the fuel cell coupled with a turbo expander for the pressure let down station.

What's happening at the same, though, is Enbridge is working with the government in Ontario to get the approvals that they need to get a satisfactory nighttime rate to begin installing the concept at the own facilities because they have estimated there's about 47 megawatts that is megawatt class within their own facilities where they'd like to deploy the concept.

As they get through the last approvals with the Ontario government on the rate structure they will be ready to move forward with their own projects, as well.

Would you expect the timing on a POSCO order later this year or do you think that could be a 2011 event?

I think it will be this year.

Okay.

Thank you.

We are already in those discussions as we speak.

Great.

Our next question comes from the line of John Quealy with Canaccord Genuity.

Hi guys, Mark Siegel for John.

Just wondering, with an increased volume of units out in the field and shortly to be out in the field, can you talk about any needs you might have for ramping up staffing, maintenance and support operations?

Or are things good there?

The service infrastructure we've built is pretty robust.

We made sure that we had the regional parts storage, that we had really good capable service people involved, and we had the systems and tools in place to be able to monitor the units remotely.

As the market grows, we will certainly add people to those functions but near term we are really ready to respond to that.

As we ramp up the business here, respond to the order flow, the immediate demand for us in terms of people is really going to be in the production facility itself, just to enable us to flush out the rest of the second and third shifts at our facility in Torrington.

Okay.

And then, there's been a lot of resurgent talk recently within the industry, particularly given competitive dynamics.

Has this chatter changed any of the conversation you are having either with potential strategic partners or perhaps even key suppliers?

I think there's certainly, there's an increasing awareness.

If you think about how industries have evolved here in the alternative energy space, wind was certainly the industry that penetrated the market and matured first.

Solar came right behind them.

And fuel cells now seem to be that next wave, particularly as we are seeing the policymakers in a lot of the key markets openly talking about the challenges that are created by these intermittent solutions and the need to have something that's clean and baseload.

A lot of the people that we are talking to as potential project partners are involved in doing projects that are wind and solar based so they understand that there's a real need for some kind of a clean baseload.

So I think it is really just raising the awareness of where fuel cells fit into that portfolio because there's clearly a third leg of this stool that's needed and there's not any other technology that can really fill that ultra-clean, continuous duty, high efficiency gap.

So I think it is a good thing that we are seeing some more activity in the marketplace and we're seeing some new players emerging because it is just helping to raise the awareness level of where fuel cells as a whole fit into the energy mix.

Just lastly, can you talk a bit about the utility appetite for fuel cells?

Are your discussions with utilities increasing in volume or are they hanging back to see how things go with PG&E?

If you think about the utility side, Korea really is a utility play.

The projects that are being put in are all megawatt and multi megawatt class.

They're all being put on to the actual transmission system, where all of the power is being exported to the system.

And that's being done through the generation companies.

So the Korean companies are the first ones that have embraced the concept.

Here in the US we are actually behind the curve because from a demonstration concept, if you look at Korea, it has got what is going to be the largest fuel cell power plant in the world, it's going to be operational here in a few months.

If you look at the domestic marketplace, it is a little bit different picture whether you're on the East Coast or the West Coast.

California, because it tends to lead in terms of energy policy, we are seeing the utilities there start to embrace the concept first.

They work closely with the Utility Commissions.

I think the PG&E installations will be important ones.

We need to demonstrate for utilities in this country that fuel cells really are viable at the multi megawatt level, that they perform like a true commercial product.

But we are already seeing more activity that's coming as a result of those projects being announced, as other utilities see the trend that's coming.

And what we're also finding is some of the non-regulated arms at some of these utilities are some of the players that we're in discussions in about things like the Connecticut projects.

Great.

Thanks a lot.

Our next question comes from Walter Nasdeo from Ardour Capital.

Thank you, good morning.

I have just a couple quick questions here.

Can you let me know what the time to fulfill these orders is at right now, and what your internal capacity is?

Our capacity is 70 megawatts of production.

Depending on the customer, the lead times are anywhere from nine to 12 months, depending on what customers' needs are.

Our approach has been, with POSCO, for example, they buy basically a year's worth of deliveries from us, and then we spread US orders in and among the units that they have ordered, because typically in places like California there's a time window when projects have to be in and operational under the rules of the incentive programs out there.

So a typical lead time today is probably 10 months, I would say.

Great.

And you probably mentioned this but I think I missed it.

When is POSCO's plant going to be up and running?

They're on schedule to actually complete the facility by the end of this year.

Since we are providing a lot of the equipment for them, to some degree we are pretty close on that schedule in terms of understanding what they want.

When they're going to actually set their dedication facility, I suspect it will be after the holiday some time.

Okay.

And jump over to the DOE loan application, where are you in that process?

Obviously it is a multi-tiered process with numerous approvals that need to be met.

Where are you at in that process?

The way the program is set up, there's really two phases.

You submit a Phase I application that has project information.

You go through a review and it's either accepted or rejected.

We have completed that phase successfully.

Then we go into Phase II where you have to provide some additional information, typically you have to spend a little bit of money to get credit ratings for the projects themselves, those sort of things.

We have submitted our Phase II application, we have gotten some questions back from them just looking for some additional information that they need to make their decision.

We are expecting that Phase II decision basically at any time now because the discussions we have had with DOE have been very productive.

They were looking for information like what are the performance guarantees under our contracts, those sort of things, that weren't requested as part of that initial Phase II application.

Assuming we get the Phase II approvals, at that point you begin negotiating your term sheet and move to closure.

Is most of the Connecticut stuff contingent upon this then?

No.

Actually we are multiple paths here.

There's 27 megawatts that are in the loan guarantee program.

But we have multiple players that are actually very deep in the due diligence process that would not be relying on the loan guarantee.

So we are really working these paths in parallel.

We will see which one of them happens first.

Some of the players that we are working with are actually interested in the loan guarantee program, and if it came through they would pull that into how they're structuring the projects, but they're looking at them first on a standalone basis without a loan guarantee.

Got you.

Thank you very much.

Our next question comes from Pavel Molchanov from Raymond James.

Thanks for taking my question.

Just thinking conceptually about the market opportunity in the US, we are at a point where the natural gas futures curve is around $5 an Mcf.

Given that, and the potentially very appealing economics of your product, what's the push back you're getting that is preventing the kinds of adoption rates you guys are hoping for?

The only thing we are really seeing in terms of push back is just customers' willingness to spend capital in just such an uncertain economic environment.

If you look at the things in our pipeline, their projects don't disappear, some of them have just been delayed.

The message we've been getting is customers are feeling increasingly comfortable about two things, One is that the volatility around gas pricing which can impact distributed generations seems to be an issue that people aren't too concerned about.

And people are getting the feeling that the access to financing for capital projects is significantly improving, which is why, if you look at the half dozen orders we have announced here since the last call, we are seeing that pipeline more quickly to closure.

Joe, anything you want to add to that?

I think generally, on the credit side, there's just more optimism in the marketplace.

We obviously got a couple deals done this month where the customers were able to find credit.

We are seeing interest from more parties.

And even most importantly is we're seeing people coming at us looking to solve these business environmental problems.

Like the ag waste farm is solving a business problem and they're really beginning to understand fuel cells.

And that should drive it.

As a followup to that, can you give an update on the quarterly sales run rate in megs that you need to get to positive for, let's say, breakeven cash flow?

On a quarterly basis it is about 25 megawatts.

So it is 100 in total.

So the assumption would be you would have 100 megawatts on an annual basis, you would have about, let's say you can get 20% gross margin, we think we can get higher but be conservative for a minute, so you get 20% gross margin on that 100 megawatts.

It provides enough operating cash to support our below the line requirement, our below the line requirement is about $40 million right now.

So it is pretty simple math.

We are really right at the inflection point and volume will drive us there.

That's helpful.

Thanks.

Our next question comes from the line of Amit Dayal with Rodman & Renshaw.

Thank you, good morning, gentlemen.

Some clarification on your sales mix.

We are seeing more component sales happen over the last few quarters.

Can you give us color on what's driving this and do you expect to come back to more power plant sales going forward?

If you look at the components, the component sales really is our activity with POSCO, as they are localizing the balance of plant equipment.

The focus for us going forward with them will be to provide the components they need to make the fuel cell modules themselves.

If you look at what's actually in our production mix, it has actually started to come back to be much more balanced as we shift things like the DFC1500 power plant to Sonoma this past quarter, and the other things we have got in the US orders pipeline really help balance out the power plant for domestic applications versus components to POSCO to support their needs.

And in the backlog we roughly have around $92 million.

How much of that is components?

In the backlog, there is probably, I would say, probably a third of that would be components.

Longer term, assuming we get to the 100 megawatt level sooner rather than later, what are the margins and the components that you expect, and margins on the power plant, if you could provide some color on that aspect?

What we expect, we have proprietary technology here.

And we are commercializing the business, we're entering the market.

Where these margins are going to go is you have a full power plant which consists of the balance of plant and this proprietary cell technology.

So what you would expect is that the cell technology will have high margins and that the balance of plant is much more mature, the balance of plant is used on typical power plants, engines and turbines, it is very similar type of technology.

So we would expect that component margins will be higher and overall power plants will be a little bit lower.

That's what we are looking for.

We are looking for an opportunity.

A lot of things depend, as the future turns out, as the future develops, what kind of competition will come, what will the market pressures be.

But for a company that's leading the pack and we will certainly have what we believe is capacity constraints, even as we ramp the business we will have capacity expense, we have the ability to manage that margin.

We are thinking technology margins in a 35% to 40%, even plus range for the components.

Thank you.

Our next question comes from the line of Scott Reynolds with Stifel Nicolaus.

Hi.

Thank you.

Just a couple of quick ones for me.

I don't know if you gave it or not, but what were the megawatts shipped in the quarter?

Megawatts shipped in the quarter were 8.4.

8.4.

And now that's not too much volume but you had a nice step down in your product cost ratio.

Is that mostly from a technology improvement or is there a mix shift in there?

In this quarter, in the cost ratio, we are reaping the benefits of the technology shift that we put into production in December of '09 so those numbers are clearly coming through the financials and we are on track now.

This is where we should be in terms of cost ratio, and cost ratio should just continue to get better from this point.

Volume, the more volume we put in on selling product will actually drive this to that 1 to 1 and then below 1 to 1 cost ratio.

Okay.

And on the OpEx side there was a step down, about $1 million -- $0.8 million -- quarter-over-quarter.

What was driving that?

A couple of things are driving it.

You have admin and selling.

So we have some incremental selling costs coming through.

We had a little more focus in R&D dollars were focused on R&D projects in this quarter.

They seem to go back and forth.

We are in a little bit of a quarterly range between admin and selling and R&D.

I would look at $4.5 million on an average basis for admin and selling and about $5 million for R&D, is about the right number.

So, that's how I would look at it.

All right.

Thank you very much.

(Operator Instructions).

We have a follow up question from Sanjay Shrestha.

Hi, just a follow up on cash burn.

Noticeable improvement in the quarter.

Looking forward, are we still looking at a 10 to 12 range or maybe better than that?

Yes.

I think we can start to look at the dynamic of this order flow coming in.

As we can close the pipeline then the cash flow will get better.

In fact, our working capital on the orders is pretty good, as we get a nice down payment on the order flow and you can actually, in a quarter, actually have a pretty substantial impact on reducing cash flow.

But if you can get your run rates up, if you can get your run rate up to 50 megawatts and then to 70 megawatts you are in effect driving cash flow down.

So if you are operating at a 70 megawatt run rate you are probably driving your cash flow in a range of 6 megawatts per quarter.

So that's what we are looking for.

All of the other factors are, all of the cost reduction is played out.

Our ability to manufacture has played out.

Really, now, if we just drive volume the model works, the model absolutely works.

We will reduce cash burn and then we just need to get to that -- in the K we say 75 megawatts to 125 megawatts of throughput, and at that point we can operating cash positive.

So really at this point we are at the inflection point and let's drive some volume and let's move this business to profitability.

Thanks, Joe.

(Operator Instructions).

We would like to thank everybody for joining us at this point.

We look forward to updating you in the next quarter because we think we have some pretty exciting things coming to be talking about.

Thank you, everybody.

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

This concludes the program.

You may all disconnect.

Everyone have a great day.