燃料電池能源 (FCEL) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to FuelCell Energy reports second quarter 2013 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 be given at that time.

(Operator Instructions)

As a reminder, this conference call may be recorded. I would now like to hand the conference over to Mr. Kurt Goddard, Vice President of Investor Relations. Sir, you may begin.

Good morning, and welcome to the second quarter 2013 earnings call for FuelCell Energy. Delivering remarks today will be Chip Bottone, President and Chief Executive Officer, and Mike Bishop, Senior Vice President and Chief Financial Officer. If you have not done so, I encourage you to visit our website, register for e-mail alerts and view our second quarter 2013 earnings release, as well as an accompanying slide presentation. Our website address is www.FuelCellEnergy.com.

A replay of this call will be posted two hours after its conclusion. The telephone numbers for the replay are listed in the press release. Once again, for those of you listening to this call via the dial-in phone number rather than via the Internet, management will be referencing a first quarter -- excuse me, a second quarter 2013 slide presentation that is available on the Investor Relations section of our website at www.FuelCellEnergy.com.

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 fuel cell 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 Chip Bottone. Chip?

Thank you, Kurt. Good morning, everyone, and welcome. Please turn to slide 4, second quarter 2013 highlights. We continue to execute on our global growth strategy, record revenue supports expanding margins, and strong backlog is moving us towards profitability. Our associates have successfully completed a production increase to 70-megawatts at our manufacturing facility in the US, as of May 1, the start of our third quarter. This successful ramp has increased our confidence and strength of our global supply chain.

We're making excellent progress on high profile projects in Asia, the US and Europe, including two large scale fuel cell parks. Construction is on schedule with the 14.9-megawatt Bridgeport fuel cell park in Connecticut and the 59-megawatt fuel cell park in Hwasung City, South Korea. These projects have elevated the global profile of our Company and our ultra clean power efficient solutions lead to increased inquiries and growth in our sales pipeline. Our existing and potential customers have greater clarity, with our value proposition and project investors with financial returns. I will discuss our results and outlook in more detail after Mike Bishop, our Chief Financial Officer, reviews our financial results for the quarter. Mike?

Thank you, Chip. Good morning, and thank you for joining our call today. Please turn to slide 5, titled Quarterly Financial Highlights.

FuelCell Energy reported total revenues for the second quarter of 2013 of $42.4 million, compared to $24.2 million in the same period last year. Revenue was higher than our guidance of $38 million to $40 million, primarily due to the timing of construction activities at the Bridgeport fuel cell park. Product sales for the second quarter totaled $34.4 million, compared to $18.7 million reported in the prior year. The increase year over year reflects higher fuel cell kit sales combined with revenue from the Bridgeport fuel cell park project of approximately $8.9 million. The Company increased its production rates during the second quarter of 2013 at the Torrington, Connecticut manufacturing facility, reaching an annual run rate of 70-megawatts effective May 1, 2013.

Service and license revenues for the second quarter of 2013 totaled $4.1 million, including approximately $3.1 million derived from service and $1 million from license and royalty revenue. For the comparable prior year period, service revenue totaled $3.5 million. Advanced technology contract revenues were $4 million for the second quarter of 2013, compared to $2 million for the prior year quarter, with the growth primarily reflecting the consolidation of Versa Power Systems. Total gross profit was $2.3 million for the second quarter of 2013, compared to a gross profit of $200,000 in the prior year quarter. This is the highest gross profit generated since we began commercializing our fuel cell power plant. Further margin expansion is expected in 2013 from higher production volumes of favorable sales mix that includes complete power plants plus installation services and lower product costs from overhead and supply chain leverage.

Total operating expenses were $9.5 million for the second quarter of 2013, compared to $8 million in the prior year period. Operating expenses increased year over year due to business development activity in the European market and fully consolidating Versa Power Systems. Net loss to common shareholders for the second quarter was $8.2 million, or $0.04 per basic and diluted share, compared to $9.1 million, or $0.06 per basic and diluted share in the second quarter of 2012. EBITDA, which is earnings before interest, taxes, depreciation and amortization, totaled negative $5.9 million, an improvement of both year over year and sequentially due to increased production volume and a more favorable product mix.

Please turn to slide 6, titled Year to Date Financial Highlights. Turning to year to date results for the six months ended April 30, 2013, the Company reported revenue of $78.8 million compared to $55.5 million in the prior year period. In this period, the Company was break-even at the gross profit level, compared to a gross profit of $2.3 million for the prior year period. Unplanned warranty and after market costs incurred in the first quarter of 2013 account for the decrease in gross profit year over year.

Net loss to common shareholders for the six months ended April 30, 2013, was $20.6 million, compared to $15.8 million, for the comparable prior year period. EPS for both periods was unchanged at $0.11 per basic and diluted share. EBITDA was negative $15.7 million for the six month period ended April 30, 2013. The change in EBITDA from the comparable six-month period was primarily due to first quarter unplanned warranty and after-market costs and higher operating expenses as a result of our expansion in Europe and acquisition of Versa Power Systems.

Now, I will transition to slide 7, titled Financial Metrics. Cash and cash equivalents including restricted cash totaled $71.7 million at April 30, 2013. Net cash used in the quarter of $14.6 million consisted primarily of the use of working capital, tied to the growth of the business, and power plant construction activities. As of April 30, 2013, the Company has separately disclosed restricted cash on the balance sheet consistent with historical footnote disclosures. This cash is pledged as letters -- as collateral for letters of credit required for certain customer contracts.

In the quarter, we renewed and increased our revolver with JPMorgan Chase, which adds another $3 million to our liquidity. The Company also closed on a new long-term agreement with the Connecticut Clean Energy and Finance Investment Authority totaling $5.9 million in support of the Bridgeport fuel cell park project. This loan will be drawn down during the construction period of this project. The principal balance of this long-term loan will be repayable in monthly installments commencing in 2021. Borrowings under this agreement in the second quarter totaled $2.6 million.

Total inventory decreased $2.8 million year over year as substantially complete power plants were allocated to the Bridgeport fuel cell park. Compared to fiscal year end, inventory is up $2.2 million, with increased work in process and raw materials to support the increased production levels. Backlog totaled $410 million as of April 30, 2013, compared to $181 million a year ago and $428 million at January 31, 2013. Backlog included product sales orders of $238 million, compared to $89 million one year ago and $260 million at the end of the first quarter of 2013.

Service backlog was $158 million at the end of the second quarter of 2013, compared to $78 million at April 30, 2012 and 150 million at January 31, 2013. The year over year increase includes the addition of service agreements for the Bridgeport fuel cell park and the growing installed US fleet. Advanced technology contract backlog totaled $14 million at the end of the second quarter of 2013, compared to approximately the same amount reported a year ago and $18 million at the end of the first quarter of 2013. Measured in megawatts, product backlog totaled 140-megawatts at April 30, 2013, compared to 52-megawatts one year ago and 151-megawatts at the end of the first quarter of 2013. During the second quarter, we shipped 12.6-megawatts of kits to POSCO, while adding the 1.4-megawatt hospital installation order to backlog.

In conclusion, our revenues are growing with increased domestic demand. We also expect our margins to continue to expand with higher production volumes and a favorable sales mix. We are well positioned for continued global growth and to achieve profitability on an EBITDA basis with annual production volumes of approximately 80-megawatts. I will now turn the call back to Chip for further discussion of our operations and markets. Chip?

Thank you, Mike. Please turn to slide 8, Global Operations. We increased production volume in our North American manufacturing facility in Torrington, Connecticut to support our strong backlog. By May 1, our team had completed the planned production ramp to 70-megawatts. This represents a 25% increase over the 56-megawatt run rate for the first quarter. Our global supply chain is smoothly supporting this increased level of production.

Greater volume drives further cost reductions and overhead leverage that moves us towards our vision of having our fuel cell power plants produce power and thermal energy below grid pricing. We do not require additional capital expenditures to support higher volume levels. As shown on the slide, production measured in megawatts has increased significantly since 2007. The present 70-megawatt run rate brings us closer to our projected EBITDA break-even run rate of 80-megawatts. We will ramp our production further as backlog and lead times demand.

Executing on our growth strategy for Europe, we are now assembling fuel cell power plants at our German-based fuel cell energy solutions production facility in Ottobrunn, near Munich, Germany. The photos show the power plant being assembled for the Federal Ministry of Education and Research government complex in Berlin. Thanks to an impressive effort led by our chief operating officer, Tony Rauseo, and his team, the production increases were accomplished smoothly on schedule.

Please turn to slide 9, Bridgeport Project Update. The Bridgeport fuel cell project park is generating tremendous interest in media coverage. Construction of the fuel cell park, while achieving all safety expectations, remains on-budget and on-schedule. The largest fuel cell project of its kind in North America, this multi-megawatt project validates our energy and environmental solutions while demonstrating our ability to execute on large scale projects. Our Company's capabilities include project development, obtaining financing, engineering, procurement, construction and operation of complete power plants. The Bridgeport project is driving an increasing level of inquiries contributing to both the size and quality of our expanding sales pipeline. The enthusiasm for this project is not limited to North America, but extends to Europe as well as the park is a replicable model for others around the globe.

Some of the project's features which are generating interest with utilities and legislatures in other regions include its large scale on a small urban footprint, its reliance on project capital to provide public benefits and the industry knowledge of Dominion, our customer and owner of the facility. Dominion is one of the largest utilities in the world, and we are extremely pleased to be associated with them. Fuel Cell Energy is providing a turnkey distributor generator solution for Dominion. The project, which is comprised of five- 2.8-megawatt fuel cell plants will be completed within a short 12 month timeframe, minimizing construction financing costs and project schedule execution risk.

The entire fuel cell park is only about 1.5 acres. The project readily demonstrates the scalability of our technology and showcases its distributive generation characteristics. It is ultra clean, extremely quiet and compact, making it easy to site in urban locations like Bridgeport. On May 3, we participating in a well-attended ground breaking with state and local dignitaries, including Connecticut Governor Malloy, Congressman Himes and Bridgeport Mayor Finch.

The Bridgeport project demonstrates the value that large fuel cell projects deliver to an extensive and diverse range of stakeholders. Owners benefit from attractive economics, communities enjoy clean, efficient and reliable distributive generation while local economies benefit from new job creation and revenues. We are seeing a growing recognition in our markets that projects like this can successfully be financed and constructed. Bridgeport is a model that can be replicated, and our expanding sales pipeline bears this out.

Please turn to slide 10, global markets. Construction of the 59-megawatt fuel cell park in Hwasung City, South Korea is on schedule. Comprised of 21 DFC3000 power plants, this is the largest fuel cell park in the world, and it's being build by POSCO Energy, our Asian partner. Korea Hydro and Nuclear Power Company, South Korea's largest utility, has a 49% ownership stake in the project.

Like Bridgeport, Hwasung City has contributed to the growing recognition of the large fuel cell park projects to clean base load power in urban locations can deliver. POSCO recently received a new order for a 2.8-megawatt plant from another existing customer, EWP. This will bring their total site megawatts to 10.8 when the project is completed later this year. POSCO's actively pursuing a number of multi-megawatt projects in South Korea. Some will provide power to the grid, like the 59-megawatt fuel cell park currently under construction, and some are for on-site applications.

In Europe, our power plant installations at the Crown Estates prominent quad 3 re-development project on Regent Street in central London is undergoing commissioning. This is a prestigious and high visibility location due to the Crown ownership and the high levels of pedestrian traffic flowing through the properties, offices and retail establishments. This elevated profile helps promote the benefits of ultra clean distributive generation. The construction of both the state-of-the-art Federal Ministry of Education and Research complex in Berlin and environmentally advanced 38 story office tower at 20 Fenchurch in central London are progressing, and the power plants for those two sites are presently being assembled. We are building a strong team for our European operations, and seeing increased activity in our sales pipeline. We are pleased with the pace of discusses, both with prospective customers and with legislative and regulatory bodies. Our local presence, leadership and business model are viewed as a positive step forward for the industry.

In the US, Hartford Steed Company purchased a 1.4-megawatt power plant for installation at Hartford Hospital in Hartford, Connecticut. Awarded under Connecticut's LREC program, the project highlights our technology suitability for hospital applications while demonstrating the ability of our projects to attract private capital. Under a long-term energy purchase agreement, Harford Steen Company will sell the ultra clean electricity and thermal energy generated by the power plant to the Harford Hospital. Thermal energy in the form of steam will be supplied to the local district heating system owned and operated by our customer and will also provide cleanly generated heat to a nearby school.

We sought and have received extensions by the way of passage of Connecticut Public Act 1306 to extend the required start date for 18-megawatts of fuel cell projects under the Project 150 program. This allows us time to complete the development and obtain project financing. Our success developing obtaining funding for the Bridgeport project was helpful in gaining this extension.

Activity levels in other US markets continue to increase, both in quality and quantity. As our growing global install base for projects demonstrates, energy, environmental and economic policy should and can work together simultaneously to solve a broad and growing range of challenges. We emphasize that the clean power generation supports economic growth, and that this goal is achievable with appropriate planning and coordination among different energies and programs. Projects like Bridgeport and Hwasung City are reinforcing a new paradigm in the minds of policy makers, power producers and utilities. Developing our megawatt fuel cell plants is not about spending more, it is about spending more efficiently.

In May, Dr. David Danielson, the Assistant Secretary of Energy for the Office of Energy Efficiency and Renewable Energy, met with us at our Torrington, Connecticut facility. He gave us the opportunity to explain how deployment of our fuel cell power plants is helping various stakeholders around the globe meet their energy, environmental, economic goals, including sustainable job creation. Revenue diversification is a key component for our business strategy. Revenue streams include sales of complete power plants and fuel cell kits, long-term service agreements, installation in adjacent services and advanced technology programs. We are making progress in increasing the contributing revenue and margin in each area.

Diversifying our geographic and market activity is another component of our business strategy. We have established customers and installations now in nine countries. We are establishing ourselves as project developers, with strong project development and financial acumen, to add to our already strong technical and service orientation. We have seen a significant improvement in the balance of our pipeline activity with no region being greater than 45% of the total. This is expected to lead to consistent and diversified order flow.

Please turn to slide 11, Summary. We are executing well on our backlog, large project execution and continuous growth in our sales pipeline. We generated record revenue for the quarter, higher production volume, and improved margins. We increased the run rate at our US manufacturing facilities to 70-megawatts, positioning us closer to an EBITDA break-even of 80-megawatts. Large scale fuel cell park installations in Bridgeport and Hwasung City are progressing well.

The validation of our Company and power generation solutions from these high profile multi-megawatt projects is driving increased interest that is enhancing our global sales pipeline. Our progress is stimulating local, state and federal government interest in North America and translating into favorable policy and domestic deployment. Our heightened international profile is supporting discussions with federal officials and will drive deployment in Europe. I would like to thank our growing global team of associates for the dedication, hard work, and thank our investors for their continued support. Operator, we will be happy to take questions at this time.

(Operator Instructions)

Our first question comes from Ajay Kejriwal from FBR Capital Markets.

Hello?

Hello. Ajay, good morning.

Good morning. So, nice quarter, congratulations. And Chip, maybe just following up on your comments on Dominion. Clearly a milestone project, at least from my perspective. So, talk a little bit about the pipeline. You mentioned you are getting a lot of interest from other parties, so what are you seeing there? Have some of the other projects that you're working on -- have they moved a little bit further down the pipeline? Just a little color there would be helpful.

Okay. Ajay, thanks for calling in. There has been a lot of positive side effects of doing that project at Bridgeport with Dominion. Obviously it adds a lot of validation, because obviously Dominion would look at a lot of different things. They are an operator, so I think it puts a lot of credibility in people's minds that they obviously did their homework.

It is a 15-megawatt project. Our strategy was always to build bigger and bigger plants, and the reason for that is that the costs go down on a per-unit basis, which is helpful. And so all of a sudden, people are saying -- wow, you know, megawatt and above is -- you guys are already doing that and have a lot of installed base. So, it really was kind of a -- just, I would say, recognition of what we're doing.

And as a result, we can actually point to drawings and lots of different things that are relative to bigger plants that is very, very helpful that somebody else is doing it. Whether it is in North America or in Europe, and certainly Asia was first to do some of these bigger projects, it has been very, very helpful. And frankly, Dominion continues to be supportive in any way we need, because things are going quite well with that project. I think it is just all around -- it is a win-win for everybody.

Good, that's helpful. And then maybe on POSCO, I thought I heard you say they're pursuing -- actively pursuing a number of other projects. To the extent you can, provide a little more color on what those projects might be. And then, in the event they get some of those projects, is there a possibility that you could see additional orders, or would those projects be more that they would produce on-site after the licensing agreement that you have in place?

Yes, Ajay, I appreciate your recognition of -- I can't be too specific for competitive reasons, more than anything else, on there -- but they have a tremendous pipeline of activity. Let me just say that. Obviously, they're building a 60-megawatt plant, which is great. If you go back historically, their sweet spot was probably 3 megawatts to 10 megawatts. So, there is a bunch of those on the list, but there is also some greater than 10, I will be clear on. For them right now, they are busy filling up the site there to support the current project, and they have some others that they just recently got, as I mentioned.

But we've got orders in place now for about 40 megawatts a year for them over the next several years. And of course, they want to bring their own capacity online in late '14, early '15. Given the lead time of these projects and things like that, I think we can support, whether it is from here more activity, or from there where we derive royalty, Ajay, to support the market demand.

Thank you, that's very helpful. Maybe just a couple on the quarter or so. The production rate of 63-megawatt, I guess that reflects on the product sales, but it sounds like you've increased the production rate to 70 megawatts. So, as we think about the next couple of quarters, should we presume that sales increase on a pro rata basis?

Good morning, Ajay. It is Mike. Let me take that one. So, sure, so we did increase the production rate during the quarter. That was over the course of the quarter, and we got to 70 megawatts at May 1. This will be our first full quarter at 70 megawatts in Q3. We would expect growing product sales from that full quarter of 70 megawatts. If you look at the lines on our P&L, if you do an average over the next two quarters, we would expect the product sales line to be in the range of $38 million to $42 million.

Got it. And then, last one for me before I pass it on -- so on the service license fees, it looks like that is becoming a nice recurring business for you. And as you implement the Dominion project, and your install base grows in Korea and elsewhere, how should we think about these revenues?

Sure, good question, Ajay. It is Mike again. On the service line on the P&L, when you look at the rest of this year, we would expect some modest growth, but we are probably in the range that we were in Q2. As we add these projects in backlog, that revenue will increase going into fiscal '14, particularly from the Bridgeport project.

Thank you very much.

Thank you. Our next question comes from Sanjay Shrestha from Lazard Capital Markets.

Great. Good morning, guys; again, good execution. A couple of questions. First, on the EBITDA break-even now at 80 megawatt, right? Previously you guys talked about 85 megawatts, 90 megawatts. Now, was there anything specific that actually happened that allowed you guys to now get to that point at even a lower volume versus even what was previously talked about in the past? What are some of the things you guys did?

Sure, good morning, Sanjay, it is Mike.

How are you?

I'm doing well. Our -- we're really keeping with our business model guidance. Our guidance has been, at the net income level, 80 megawatts to 90 megawatts of annual production volume gets you to net income break-even. On an EBITDA basis, we have been talking about approximately 80 megawatts to get to break-even on an EBITDA basis. To get there, obviously you need margin expansion to do that. We're seeing that come through this quarter. We would expect to see more of that.

There is really three factors that go into margin expansion. One, and the biggest driver near term is the production rate. So as we ramp, we get leverage. In the factory, we have 90 megawatts of capacity in the factory. So as we fill that up, we get leverage there, as well as from our supply chain.

Additionally, we will see service leverage coming through in the future, as we both add additional units in the field, and as our fleet transitions more from sub-megawatts to multi-megawatt power plants. And then finally, sales mix. So, as we do complete power plants, and add ancillary services such as EPC work, construction, installation, that type of thing, there's additional margin opportunity. All three of those combined will lead to margin expansion. The business model has us in double-digit, low-teens margins, as we get to that 80 megawatts to 90 megawatts of production volume.

Got it. That was actually going to be my follow-up question, right? I think you guys mentioned two things about a strong incremental margin, so, beyond that 70-megawatt, and the supply chain leverage, right? Overhead absorption, we obviously kind of know that -- higher volume leverage in that model, right? Can you be a bit more specific on the supply chain leverage, and maybe the incremental margin as you go from 60-megawatt to 70-megawatt to 80-megawatt to 90-megawatt? What is that incremental margin you guys get -- getting you to that double-digit gross margin and, therefore, break-even, even on a net income level?

Sanjay, good morning, this is Chip. Let me take that one here. Couple things there. There is no doubt that the team has done a good job on the supply chain. We've strengthened the supply chain, which means we've had some rotation of some of the suppliers or more suppliers, whatever it might be, the strategy there. But we've been gaining from that exercise, obviously leveraging it sometimes to the bigger players, now that we have a bigger purchasing value. So, we are seeing that come through in terms of cost reductions at the gross margin product level.

The other thing you will see is just the leverage we're going to get. As we ramped in the second quarter, obviously there is training required, and there's some built-in -- I wouldn't say built-in -- there is some inefficiencies relative to the overhead, just to get safely and consistently to that higher run rate, which the team did, and we knew that. You are going to get some gain from that leverage there as well. Those are the two drivers.

I can just tell you that we're seeing the cost reductions come through, based on the volume or the sourcing actions we're taking. And you will see further leverage, and those two things combined, on top of what Mike said, is going to get you the expanding margins going forward on the higher volume.

Got it. One final question for me, then, guys. I guess there is a bit of history in making here in the fuel cell sector, if you guys do get to that EBITDA break-even level sooner rather than later, which seems to be the case. Now, when I look at your backlog, obviously it is pretty damn impressive. So as you have now all this sort of the reference project, right? When I sort of think about the Company over the next 12 to 18 months, should I be expecting big-sized project? Or what type of a new project win should we be expecting, where your backlog remains stable to maybe even growing as you continue to -- more from a book and burn standpoint, how do we think about that, other than the fact that it probably would be lumpy on a quarterly basis?

So, there is no question that we are transitioning to larger projects, number one, just in terms of megawatts. And with a given project, we're also doing more scope. In the past, we might have sold equipment, Sanjay. Now, like Bridgeport -- a significant portion at Bridgeport was nonequipment-related revenue. We're really kind of setting ourselves up, and that was a great testament, that project, if you will, to be project developers for the projects that require that.

Right.

But we're also -- the people that we are working with that perhaps have some of those skills as well, they're going after bigger projects as well, just because they know the math works better, the transaction costs are obviously leveragable. Our story, I would say, is finally getting through. And we're seeing that, frankly, in Europe, as well. And it took a little bit of education because our business model is a little bit different. We do make guarantees on terms of our performance and things like that, that when are you doing bigger and bigger projects, you may not have to do with smaller projects. I think we've assembled a different mentality here, and it seems to be paying off for us. It will definitely be bigger, and we definitely want to have more, and then we also want to have some diversity. So, that's what we're focusing on right now.

Okay. That's great. Thank you so much, guys, and congratulations.

Thank you.

Thank you. Our next question comes from Emily McLaughlin from Stifel.

Hi, good morning. Just one for me. Now that the Bridgeport project is underway, what does the rest of the US pipeline look like? And at what stage are some of the discussions that you're having?

Emily, good morning. This is Chip. And you can ask more than one question, but we will answer your first one here. The other guys got more than one, so you get more than one, too.

We look at the world kind of in four pieces. We look at the eastern part of the US, which is, you can imagine, the northeast. We look at the west, which is primarily California, Europe, and then Asia. The Asia piece is pretty well set with what we're doing with POSCO. Europe, we're working on rather some large projects. And again, I'm not trying to be coy, but given we work in a competitive world, I can't exactly say specifically what our strategies are -- who are the people we are talking to. But we're going after large projects where there's either no funding required or incentives, or ones that have funding available and -- to execute those in the next, certainly 6 to 12 months.

In the east, there's established programs that we can leverage, both at the federal level and the local level. Out west, there is obviously programs in California, and we have a number of large projects there, just using those existing programs. And in the east, you have different programs in different states. And like I said, we're -- the interest level that we've had, based on the Bridgeport project, and just other projects we've done over time. And we've got 25 megawatts of projects running in California, for example, and probably 10 or 15 in the east here. So, we have an install base now that people can reference and go visit. Pretty encouraged, and I would say that within a fairly short-term period here, you will see some other projects come to fruition.

Okay, and then just one clarification -- you said a few minutes ago that at the 70-megawatt run rate, you would be at $38 million to $42 million revenues at the product level. So, would the service and the contract revenue would be on top of that? Is that the right way to think about it?

Hi, Emily. This is Mike. Yes, that's the right way to think about it. There is three lines on the P&L and the revenue side, so that $38 million to $42 million I mentioned is the top line. The other two lines, consistent with what we reported in Q2, a little bit of modest growth on those as we go out through the rest of the year.

Okay, great. That's all for me.

Thank you.

Thank you. Our next question comes from Walter Nasdeo from Ardour Capital.

Good morning.

Good morning, Walter.

A lot of my sales questions have been discussed already in the Q&A, and I guess I'm understanding how you're establishing the funnel. And on the backlog side, how are you monetizing that? Is that -- are you still working on like a 12-month rolling, turning it to revenue kind of thing?

Yes, Walter, this is Chip. I feel bad that I can't be more specific on what specific projects, but I think you can appreciate we live in a competitive world, and we can't say that. But yes, so what we're doing, Walter, is obviously we got a backlog, and then we're also -- we have capacity that we -- I think we've showed most people in our presentations for other projects, and we're trying to manage that from a -- roughly a 12-month project schedule. That is how we're kind of fitting things in. When we sign these contracts, we're working both the timeframe as well as the project itself. I don't know if that answers your question, but we -- because a lot of the US projects are based on tax equity, you have to be careful what we commit to, Walter, because we have to deliver in those, whatever the tax commitment year is, whether it is '13, '14 or '15.

Okay.

Walter, this is Mike. Let me take another slice at that on the backlog side of your question. If we look at our commercial backlog, that really breaks down into two components -- commercial and service. So, service -- if you are thinking about modeling, service you would model out over a long period of time. Most of our service commitments are tied to financing, so that $157 million probably gets modeled out over 5 to 10 years.

The product backlog turns much quicker. But in there is multiple-year commitment to POSCO, and as Chip said, we're doing about 40 megawatts a year, and that comes down in the out years to POSCO, through 2016. So, you really have to spread that over the next several years.

Okay. That's -- yes, I get that part of it.

If we use Bridgeport as a model, right, when we were up there for the ground-breaking, it is a very -- it is a nice, elegant solution to push power into the grid. Is that -- can you look to that as replicable, as you talk to other utilities, instead of on a municipality basis, but working more with the utility themselves to supplement whatever -- whether it is a coal or a nuke or whatever, type of power production that they're currently working with?

Walter, this is Chip. Let me take that. Absolutely. They may not all be 15 megawatts. They might be 5, they might be 10 or something, but that really opened the door for us to have that dialogue. We've always had dialogue with certain people -- certain utilities we've put plants in. But I think with that project in itself, that has been very helpful.

And Dominion has been very helpful in supporting our story as well. The thing is going well, which is nice, but let's just say that they have been helpful on multiple fronts for us to find other opportunities. But it is not all just about them, we are talking to others. And it is interesting -- you could put -- for some big users and stuff, there are those out there that you could actually put 5 megawatts or maybe even others on the customer side of the meter. That's not unheard of, and we're finding those opportunities.

Through the utilities themselves?

Non-utility. So yes, we're talking to utilities about projects like Bridgeport, which is more the utility side of the meter, but there are large opportunities, I was saying, on the customer side of the meter as well.

I get that. But does that relationship work through the utility, where the utility says -- look, I got some sort of large plant here that is just sucking power at a crazy rate, why don't we bring you guys in on their side of the meter to alleviate the pressure on the grid itself? Has that type of discussion ever happened?

We are having those discussions at some utilities because if you're putting little plants all over, it really doesn't amount to a meaningful amount of power sometimes. But 5-megawatt, 10-megawatt, 15-megawatt plants may actually be the difference between being able to satisfy, particularly things in your neck of the woods there, events and things like that, that have happened, right?

Right, okay, cool. Thank you very much.

Thank you.

Thank you. Our next question comes from Les Sulewski from Sidoti & Company.

Good morning, guys.

Good morning, Les.

I have a question regarding perhaps government incentives such as the monetary or tax incentives, either to the utilities that perhaps could drive further product sales than maybe were unperceivable in the past.

Okay. Les, this is Chip. Let me start in the US, because in the US we have both federal incentives, and then there is, each state has their own, and it literally is a portfolio because it might -- there is all kinds of different things that they do from property tax to this, that and the other. But at the federal level, that program goes through 2016, and that's an investment tax credit worth 30%. So, assuming that you're a utility that is a noncooperative, you can monetize that, and obviously our customers can monetize that, assuming that they have a tax appetite. But there is also people out there willing to finance these projects that obviously can monetize that federal tax credit.

At the state level, there are just more -- they're different forms, but those -- there's, frankly, when you dig around a little bit, particularly in probably a couple of states out west, and certainly three or four states in the east, those incentives exist when you're talking to the right people sometimes. In Europe, there's frankly -- there's money around.

Our pitch has been -- it is not about spending more money, it is just figuring out how to spend your money wisely. We're finding opportunities that if we can deliver on our commitments, which we're comfortable, we can find ways to move things forward. Now, having said that, we don't want to be sitting here -- our goal is to be able to have our product stand on its own without incentives. That is a function of continuing to focus on, as Mike said, the cost reductions of the product and overhead leverage and things like that. So, we're still on that track, but at the same time, there is enough money around to do a bunch of projects.

Thank you. And one other question regarding research -- is there still a lot of cost involved, moving forward? Or you have kind of plateaued there?

No, we have really transitioned, clearly over time, and we're producing 70 megawatts. We're not an R&D company anymore. We still do R&D as it relates to product development to make improvements and things like that, but that spending has shifted a lot in recent years to more supporting projects and things like that. We have our advanced technologies group that Tony Leo heads up that does a lot of forward-thinking type projects, such as hydrogen and carbon capture and things like that, that one could talk about as R&D, but we get paid for all of that now.

Excellent. Thank you very much.

Okay. Thank you.

Thank you. I would now like to turn the conference back over to Mr. Chip Bottone for any closing remarks.

Well, thank you, everybody, for joining today, and we look forward to speaking with all of you on our next call. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect, and have a wonderful day.