燃料電池能源 (FCEL) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to FuelCell Energy third-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. (Conference Instructions).

As a reminder this conference call is being 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 third-quarter 2013 earnings call for FuelCell Energy. Yesterday evening FuelCell Energy released financial results for the third quarter of 2013. The earnings release as well as a presentation that will be referenced during this earnings call is available on the Investor Relations section of the Company website at www.fuelcellenergy.com. A replay of this call will be available two hours after its conclusion on the Company website.

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.

Delivering remarks today will be Chip Bottone, President and Chief Executive Officer, and Mike Bishop, Senior Vice President and Chief Financial Officer.

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, third-quarter 2013 highlights. For the third quarter, FuelCell Energy made a solid progress generating record revenues and expanding margins. During the third quarter our US manufacturing facility produced at an annual production level of 70 MW, maintaining the recent 25% of production increase.

We just announced an agreement with NRG for the sale of ultra clean, efficient and reliable fuel-cell power plants. We are pleased to be associated with NRG, the largest independent power producer in North America. The company owns approximately 46,000 megawatts of power generation and serves over 2 million retail customers.

This agreement leverages our sales and marketing resources and provides customers with a power purchase agreement financing option. The PPA option is expected to be well received by customers that like the pay as you go model and particularly by customers such as municipalities, universities that cannot monetize the US federal tax credits.

Construction of the 14.9 megawatt Bridgeport fuel cell parks in Connecticut and the 59 megawatt fuel cell park in South Korea are both proceeding to plan. These projects are creating global interest, leading to discussions with prospective customers.

We are experiencing strong activity levels in our global sales pipeline and benefiting from the growing awareness of the value of ultraclean distributed generation fuel-cell power. This gives us confidence in near-term order flow to support the production levels.

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 five entitled Quarterly Financial Highlights.

FuelCell Energy reported record total revenues for the third quarter of 2013 of $53.7 million compared to $29.7 million in the same period last year. Both revenue and margin benefited from shipments to the Bridgeport fuel cell park.

Product sales for the third quarter totaled $45.4 million compared to $21 million reported in the prior year. Revenue from product shipments and EPC services at the Bridgeport fuel cell park was the primary driver for the year-over-year revenue increase as significant construction and installation activity was completed in the quarter. This project accounted for approximately $28 million of revenue during the third quarter of 2013.

We have approximately $17 million of backlog remaining on this project which will be recognized as the remaining installation and startup activities are completed between now and the end of the calendar year.

Service and license revenues for the third quarter of 2013 totaled $3.7 million including approximately $3 million derived from service and $800,000 from license in royalty revenue. For the comparable prior year period, service revenue totaled $6.5 million.

The general trend for service revenue is increasing with a growing installed base; however revenue from schedule modular exchanges is recognized at the time of the exchange and there are no comparable activities during the third quarter of 2013 explaining the decrease compared to the prior year.

When the Bridgeport project becomes fully operational, the associated service revenue will begin to be recognized and will result in an increase in quarterly service revenue. Advanced Technology contract revenues were $4.6 million for the third quarter of 2013 compared to $2.1 million for the prior year quarter with the growth primarily reflecting the consolidation of Versa power systems.

Total gross profit was $4.5 million for the third quarter of 2013 compared to a gross loss of $2.7 million in the prior year quarter. This is the highest quarterly gross profit generated since we began commercializing our fuel cell power plants.

The sales mix that included complete power plants combined with improved overhead absorption drove the margin improvement. This is illustrated in the chart to the lower right of this slide which bridges the year-over-year change in gross profit. The strong incremental gross margin in product sales demonstrates the operating leverage within the business. With supporting sales volume we expect further margin expansion at current production levels which is 70 megawatt annually. Over time and beyond 70 megawatt, we see additional margin expansion coming from higher production volumes, a favorable sales mix that includes complete power plants, plus installation services -- service and other revenues and lower product costs from overhead and supply chain leverage.

Total operating expenses were $9.1 million for the third quarter of 2013 compared to $7.8 million in the prior year period. Market expansion and research in developmental activity in the European market combined with solid oxide fuel cell commercialization initiatives accounted for the year-over-year increase in operating expenses.

Net loss to common shareholders for the third quarter was $6.4 million or $0.03 per basic and diluted share compared to $10.7 million or $0.06 per basic and diluted share in the third quarter of 2012.

EBITDA, which is earnings before interest and taxes, depreciation, and amortization, totaled negative $3.4 million -- an improvement both year over year and sequentially due to sales mix and higher production values.

Please turn to slide six titled Year-to-date Financial Highlights. Turning to year-to-date results for the nine months ended July 31, 2013, the Company reported total revenue of $132.5 million compared to $85.2 million in the prior year period. Gross profit was $4.5 million for the 2013 period compared to a gross loss of $400,000 incurred in the prior year period. Net loss to common shareholders for the nine months ended July 31, 2013, was $27.1 million or $0.14 per basic and diluted share compared to $26.6 million or $0.17 per basic and diluted share in the prior year. EBITDA was negative $19.2 million for the nine-month period compared to negative $19.3 million for the comparable prior year period with unplanned warranty and aftermarket costs and higher operating expenses from our European expansion as well as the Versa acquisition accounting for the difference.

Now I will transition to slide seven, titled Financial Metrics. Cash and cash equivalents including restricted cash totaled $91.4 million at July 31, 2013. The total cash on the balance sheet increased by $19.7 million which includes net proceeds of $35.5 million from the issuance of convertible notes during the quarter, offset by cash used in operating activities of $14 million, capital expenditures of $1.5 million and preferred dividend payments and other activities totaling $1.3 million. Depreciation expense for the quarter was $1 million. Cash used in operating activities consisted primarily of the use of working capital specifically billings and timing of milestone payments for fuel cell kits shipments to Asia and progress billings for the Bridgeport fuel cell park.

We completed a $38 million convertible note offering during the quarter. These are senior unsecured convertible notes with a maturity date of June 15, 2018. Interest is payable at 8% semiannually in arrears beginning December 15, 2013. The notes are convertible into shares of the Company's common stock at a fixed conversion rate of approximately $1.55 per share of common stock. This offering provides working capital to enable the continued growth of the business.

Total inventory decreased by $2.6 million in the quarter on execution of the Bridgeport project. While the production rate increased 25%, we have been working diligently to minimize growth in raw materials and work in process inventory.

Backlog totaled 30 -- excuse me, $381 million at July 31, 2013, compared to $172 million a year ago and $410 million at April 30, 2013. Backlog included product sales orders of $200 million compared to $76 million one year ago and $238 million at the end of the second quarter of 2013. Service backlog was $163 million at the end of the third quarter compared to $83 million at July 31, 2012, and $158 million at April 30, 2013. The year-over-year increase includes the addition of service agreements for the Bridgeport fuel cell parks and a growing installed US fleet. Advanced Technology contract backlog totaled $18 million at the end of the third quarter compared to approximately $14 million at both July 31, 2012, and April 30, 2013.

Measured in megawatts, product backlog totaled 123 megawatts as of July 31, 2013, compared to 43 megawatts a year ago and 140 megawatts at the end of the second quarter 2013. During the third quarter we shipped 16.8 megawatts including 8.4 megawatts of fuel cell kits and 8.4 megawatts of complete power plants.

In conclusion, the financial results this quarter illustrate the margin expansion opportunities within the business based on increased volumes. We expect our margins to continue to expand at the 70 megawatt annual run rate due to continued manufacturing efficiencies and cost reductions and then expand even further with higher production volumes in a favorable sales mix.

we are well positioned for continued global growth and to achieve profitability on an EBITDA basis with an annual production volume 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 eight, Operations Execution. To execute on backlog during the second quarter our team increased production volume at our North American manufacturing facility in Torrington, Connecticut, to the present 70 megawatt annual production rate.

As I mentioned earlier, we maintained the 70 megawatt production rate throughout the entire third quarter. This is consistent with our current production planning. Based on committed production volume and projected order flow from our pipeline, we anticipate continuing to produce at 70 megawatts and will increase production further as backlog and lead time support. Our team executed seamlessly on the 25% increase to 70 megawatts and we are confident that we can smoothly ramp further as order volumes supports.

Margins will continue to expand as volume grows contributing directly to profitability in a number of ways. Growing volume generates higher margins through greater supply-chain leverage and improved absorption of fixed overhead. A product mix containing a high percentage of complete power plants versus fuel cell kits also contributes to higher margins which we demonstrated this past quarter.

Based on process improvement cycle time reductions, and improve production flow, we increased our North American annual capacity at our Torrington facility to 100 megawatts from the previously stated capacity of 90 megawatts. This increase in capacity was accomplished without any material capital investments. Our expanded partnership and agreements with POSCO will add a further 200 megawatts of annual production and capacity in Asia, 100 megawatts of which will be online in 2015. Through industrial engineering the production capacity has been increased to 100 megawatts from the 70 megawatts previously stated using production equipment from the original plant.

This global capacity increase supports our further revenue growth and revenue mix enhancement without capital outlay by FuelCell Energy. As you can see, infrastructure plans are aligned with our global growth and profitability plans.

During the third quarter, our FuelCell Energy solutions team produced the first fuel-cell stack to be assembled in Europe at our Ottobrun, Germany facility. The finished power plant will be installed at the strategically important Federal Ministry of Education and Research Government Complex in Berlin. With this milestone, there is local manufacturing presence on three continents for our products.

Please turn to slide nine, North American Update. The 14.9 megawatt Bridgeport fuel cell park has generated global interest and is translating into opportunities for future projects. FuelCell Energy is providing this turnkey solution for Dominion, one of the nation's largest utilities. It demonstrates our Company's capabilities including project development, engineering, procurement, project management and construction expertise.

In addition to project execution metrics, the project team is performing exceptionally to environmental and safety requirements set by Dominion in the city. The finished park will be comprised of 52.8 megawatt fuel-cell plants.

The commissioning process has begun. The first unit began producing power at the end of July. The second unit is on heat up and the full park is on schedule to be fully operational by the end of the year.

FuelCell Energy has demonstrated our flexibility to be either an agreement supplier that provides long-term plant operation and services, or a project developer of sophisticated megawatt-sized projects.

Project development is the ability to deliver an operating installation. This begins with obtaining a project site, gaining approvals from regulatory agencies and negotiating power purchase agreements with strong credit offtakers in developing the project financial model. We then seek project investors.

Ultimately we provide engineering procurement and construction services to install the fuel cell power plants and then operate and maintain them over the term of the PPA.

The Bridgeport fuel cell park project caught the attention of NRG Energy and after extensive analysis of our products, the market potential and the synergies between the organizations, we are pleased to be collaborating with them. This agreement opens up new customer relationship potential for us across the country, leveraging our existing marketing resources as well as providing financing options. NRG is a leader in the power generation industry and this agreement provides further validation of the value proposition for our power generation solutions.

I would like to give you some insight into our plans for closing new projects. The high level in the short term we want to close 30 megawatts of new orders. We are targeting to close one large project and a handful of megawatt orders to align with our production plants and financing commitments.

I will detail as much as I can, but have limits due to the competitive reasons for nondisclosure agreements.

We submitted bids under the second of five rounds at the Connecticut low emissions renewable energy credit or LREC program and were recently notified that two of these projects have been accepted. We are now in discussion with the site owners on contract execution. The LREC program promotes clean distributed generation for the industrial and commercial customers.

Under the Connecticut Project 150 Program, we are continuing to develop 18 megawatts of approved projects. Like Bridgeport, we will develop the projects and supply the fuel cell power plants, provide EPC services, and operate and maintain the plants for the term of the PPA.

In early July, the Connecticut Department of Energy and Environmental Protection, or DEEP, issued an RFP seeking a total of 174 megawatts of renewable power generation with minimum project size of 20 megawatts. We either submitted bids directly or participated in four fuel cell projects totaling 84 MW. The fuel cell projects will provide baseload renewable power at sites in the state that minimizes the need for transmission, as the achievement of the state's RPS goals improves electrical infrastructure and creates significant economic development within the state.

One of our four DEEP proposed projects is a 28 megawatt fuel cell park in Killingly. The proposed project will consist of 10 DFC 3,000 fuel cell power plants operating on clean natural gas with power cell to electrical grid.

Another DEEP proposed project is a 5.6 megawatt fuel-cell as part of a renewable power park in Montville, Connecticut. NRG Energy, the owner of the existing plant, has proposed reconfiguring its plant into a biomass plant with the option of installing 5.6 megawatts of fuel cells in a 2.3 megawatt solar array. Our DFC power plants are ideal for renewable energy parks where the ultra clean distributed base with attributes supplement intermittent assets like solar and can play a role in repurposing older plants, and electrical interconnections are already in place.

New Jersey continues to provide near-term order potential for on-site installations under the combined heat and power program, and we are actively pursuing several megawatts opportunities. On the West Coast we are actively working both megawatt and multi-megawatt opportunities, project financial structures consists of both purchase as well as finance programs such as PPAs or leases.

What we see are projects with strong multiyear savings to customers, carbon reduction, and virtual elimination of emissions and a very low risk profile.

Due to the nature of the clients we are talking with, there is significant interest from financiers. We are working to source and structure financing programs to allow us to provide ownership and payment options to prospective customers. Creating a financing program will enable additional order volume, particularly with non-taxpaying entities such as municipalities and universities.

In short, we can demonstrate competitiveness of our offering by the attraction of customer interest in ability to compete against others in the marketplace. The market for clean distributed hydrogen generation and compression offers potential commercial market applications for our DSC H2 configured tri-generation power plant. The value proposition is compelling, including competitive economics.

Our DSC H2 demonstration installation at a very large wastewater treatment plant outside of Los Angeles with our products, achieved an important milestone operating for more than two years and logging more than 14,000 hours of renewable biogas while generating hydrogen for vehicle fueling plus electricity for the Orange County sanitation district.

We are working on the next step which is the megawatt class DSC H2 project.

Other milestones related to the potential hydrogen business is the success our Advanced Technology team has demonstrated by compressing hydrogen to 3,000 pounds per square inch for over 10,000 hours utilizing solid-state electrochemical hydrogen separation and compression technology. At a level of 3,000 psi has commercial applications and the next milestone is to compress hydrogen up to 6,000 psi. The first field trial of the electrochemical separation technology will be at the Village Farm's DSC H2 project in Vancouver, Canada.

Please turn to slide 10, Global Markets. POSCO Energy, our partner in Asia, is completing the 59 megawatt fuel cell park under construction in South Korea, the largest fuel cell parks in the world. Construction is on schedule with 20 of the 21 plants on-site. The commissioning process began over the summer and the park is already producing partial power.

We are working closely with POSCO on the design and construction of the fuel cell component manufacturing facility at their campus in Pohang, South Korea. Groundbreaking is expected early fall this year with fuel cell production to begin in early 2015.

The Asian market area continues to expand, including growing interest in countries like Indonesia and Japan. POSCO is pursuing a variety of multi-megawatt projects in fuel cell parks in South Korea as well as developing opportunities in other Asian markets.

In our European served area, we are executing on high visibility installations in Berlin and London while pursuing megawatt class projects. Our fuel cell power plant installation at the Crown Estate's prominent Quadrant Three redevelopment project on Regent Street in central London is undergoing commissioning. Due to ownership by the British Crown and the high level of pedestrian traffic and the properties, offices and retail establishments, this is a high-profile location for showcasing the attributes of our clean and efficient power generation solution.

Construction of the Federal Ministry in Education Research Complex in Berlin, and environmentally advanced office tower at 20 Fenchurch in central London are progressing. As I mentioned, assembly of the fuel cell stack for the Berlin complex was completed at the FuelCell Energy Solution's manufacturing facility in Germany.

We are pleased with the pace of our market development progress in Europe and we have assembled a strong team and local manufacturing capacity. We remain actively engaged with government bodies at the EU country and regional levels. We are now members of multiple organizations and are attracting notice based on our experience, business operating model and competitiveness. Our European pipeline is in excess of 80 megawatts.

We are pleased that Fraunhofer IKTS, our German-based joint venture partner, established the Fraunhofer Synergy Center for energy innovation at the University of Connecticut last month. The SG's proximity to our corporate headquarters enhances collaboration and demonstrates the depth of our partner's interest in fuel cells. Fuel cell research performed at the Center will benefit both FuelCell Energy Solutions and FuelCell Energy. Our relationship with Fraunhofer, Europe's largest application oriented research organization allows us to leverage our internal research and develop resources while gaining further market recognition in Europe.

Please turn to slide 11, Summary. To summarize, for the third quarter, we generated record revenues with expanding margins and maintained a record 70 megawatt production rate at our US manufacturing facility while increasing in capacity at 100 megawatts. The plant 200 megawatts by POSCO provides longer-term and sustainable growth. We are executing well on projects in all of our markets and are encouraged by the positive response to high visibility projects like the 14 megawatt Bridgeport project and the 59 megawatt South Korea project and the interest there generated among prospective customers, partners and government officials.

We are actively working our pipeline which includes multi-megawatt fuel cell park submissions as well as on-site power projects. Our relationship with NRG Energy opens new customer channels and ownership options particularly with the PPA model. We are working hard to close 30 megawatts of near-term orders as mentioned.

High levels of activity in our global pipeline suggest that we can grow volume to target levels as we continue to execute on our strategy and achieve Company profitability.

I thank our talented associates for their hard work and think all of you for your continued support. Operator, we will be happy to take questions at this time.

(Operator Instructions). Sanjay Shrestha, Lazard Capital.

Good morning. This is [Jess Morrison] in for Sanjay. I have two questions here.

First, with the energy agreement. How do you see this impacting your future negotiations now that you have energy as a customer and, second, can you give us any more color on the volumes we should expect from the partnership? Thanks.

Let me take a shot. Mike might have something to add to that.

This is somewhat of a unique approach that we are taking with NRG. When we look at these projects, there's three value propositions here. One is the customer project rate if it is a power purchase agreement, there is something in it for them. There is obviously something in it for NRG in this case and there is obviously something in it for us. We actually established an operating model that really puts that whole question I think that you asked to rest here.

So the structure that we put together basically allows us -- allows them to achieve the return we are looking for and allows us to deliver the value proposition the customer [might want] for ours.

So I don't see it as a competition. In fact what we have done is we have actually shared customers we were either working on before or trying to penetrate into and vice versa. So that is really not the issue. The issue is closing the projects and from the early discussions we have had with those guys, I think that both teams are very focused and pretty pleased with where we are.

I don't know, Mike, if you want to add anything on the structure. But --.

I think you covered it there except and, Jeff, this is Mike. As far as order potential we were working with NRG in the markets that we are already active in. So we have pipeline that has been very well developed. And as Chip said, this provides us another tool in the toolbox to go to those customers with a PPA option with a solid partner such as NRG to substantially put FuelCell's CHP projects on site. So we are really excited about the partnership and do expect near-term order activity as a result of it.

Okay. Thank you very much.

[Les Polesky], Sidoti & Company.

Good morning. Just a few quick ones. First, other than Connecticut, I noticed you mentioned New Jersey as well and California. Have you seen any other activity from states passing a mandate for renewable energy?

Yes, Les, let me take that. The majority of states in the US have objectives for renewable portfolio standards. The question is are they really doing it and how are they doing it. So for us, in six states in the nation, fuel sales on natural gas are considered classwide renewables and then of course on biogas there are renewables everywhere.

But I think perhaps the question is what states are actively pursuing their objectives. And I would say it is clear that Connecticut is. It is clear that New Jersey is emerging as one. It is clear that California always has been.

But we are seeing other states particularly in the Northeast that both are trying to put together programs or deal with infrastructure shortages or things from Hurricane Sandy and things like that. So I would say that the activity is expanding in states in the East. And there is just also generally you have utility companies making investments like Bridgeport -- or Dominion did in the Bridgeport project in a variety of locations for different other reasons. So I would say that the environment right now for what we do is probably as buoyant as it has ever been which is baseload clean or renewable energy.

So match it up as I mentioned with solar and that is nice too. We are doing several projects or talking to people about matching up with the solar ray which also is a Class I renewable and many of the states as well. So I think that I am quite happy right now with the level of activity; and right now we just have to match up with the closure rates of the projects to the production that we can produce because many of these projects today are financed particularly in the US with tax equity. And you have to make sure that we get those delivered and started up and commission it at the right time to online with their expectations as well.

Great. Now I want to follow up on that with the CT DEEP program. Do they provide any dates on the closings and selection process or is that a little too early to tell on that?

No, they have put to -- we would expect they would conclude their analysis is what you are doing right now. Everybody submitted their bids in August and they are looking at all the different proposals and trying to decide. There is a criteria that they have. It is not all the lowest price.

Some of it is based on other factors. Is it a portfolio approach, et cetera, et cetera? But I would expect within 30 days is what they have led us to believe that they would decide on which projects they are moving forward with. But that is always subject to change. I guess they run the processes through RP, but that is what they have led us to believe.

Thank you.

Ajay Kejriwal, FBR.

Congratulations on the quarter and the agreement with NRG. And to me it looks like associating with a respected name like NRG will definitely add credibility. So maybe just talk a little bit about tax equity. Does the agreement also address the tax equity part of the project cost for the customer?

Let me take that one. Yes. With NRG, the agreement allows for NRG to basically buy the power plant from FuelCell Energy, they would be the owner, and then provide the PPA to the end customer. So NRG would essentially bring us all the financing which would include tax equity into that equation.

Got it. And Chip, where would you expect the biggest impact from this agreement near-term? Would it be on your existing pipeline of projects in Connecticut or would you expect this to be realized more over a period of time and help you brought your pipeline beyond what you have currently?

I will take that one. I think it is going to have a significant impact on California. But we also have projects that we literally have identified both in the East as well.

So, I think it is the point, the question is you raise the right question, could you monetize the tax credit? The answer is, of course, yes. But given the structure that we have developed with NRG, we also can be competitive. So bringing the financing at a competitive cost of capital, et cetera, et cetera allows us to move forward with some of these things frankly that were hung up.

So I think it will have national impact for us. They have a retail business as well as their own wholesale type plants. And we are working with them on both levels. So, so far so good. We are pretty pleased with the interest level and we are working to close business with them as quickly as possible.

Got it. And then maybe shifting gears. Chip, you mentioned you want to close 30 megawatts near-term. And I know you have a limitation to what you can say, but how should we think about fiscal 2014 assuming you close these projects near-term. Would your production level be close to 80 megawatts, ahead of 80 megawatts? Just some color around production for next year.

We don't give out guidance during the year, for the year, the following year. But we do that in December. But I will just give you a little bit perhaps what might be directionally correct. As we are right now, 70 megawatts we are cruising along on that. What Tony and the team has been able to do is flex pretty quickly.

We also will have next year kind of a mix change, a favorable mix change which -- we get these orders -- will have higher percentage of power plants again which we saw the leverage on the model when we do that with Bridgeport. So I think the combination of staying at 70, perhaps flexing more, but more importantly the mix is the thing that is going to keep us growing in 2014.

Got it. And maybe last one for me before I pass it on. So did I hear correct that EBITDA breakeven is now 80 megawatts? I thought in the past you had said 80 to 90. So it is a good production. Sounds like production efficiencies are kicking in.

Yes that has been our guidance in the past. And we see ourselves at the lower end of that guidance based on what we expect for future order flow in the marketplace being complete power plants as Chip mentioned and getting additional leverage in the factory as well as adding incremental service and other revenue.

Thank you.

Adam Krop, Ardour Capital.

Good morning. First question is on the product backlog. If you could maybe provide a little bit of color around the geographic breakdown there. Is that the typical 75, 25 South Korea, US? Just curious if you are seeing any other new markets come into the backlog in maybe Europe or Asia?

Sure. The business model really calls for a third, a third, a third from Asia, Europe and the US. We have been heavily weighted towards Asia with the tremendous activity that POSCO has had going on in Asia. So that has made up a large percentage of our backlog. And we would expect US to start to take up a bigger percentage of that backlog and then Europe next.

But the business model goal is obviously trying to keep the same level of activity in Asia and add in US and Europe on top of that.

When you look at our backlog today, we have about 123 megawatts of production backlog; about 113 of that is for POSCO kits going to POSCO to serve the Korean and Asian market. Beyond POSCO the lion's share is US related to finishing up the Bridgeport fuel cell park and some other installations in the US and we have about 1 megawatt in Europe right now.

That's good. Thanks. And then on the -- when I look at the implied backlog on the product backlog or the implied ASP on the product backlog, it looks like it is coming down over the last few quarters. Is that simply a mix issue? Are there any other issues in there or moving parts in there? And if you can comment on any pricing strategy in the near term, that would help me. Thanks.

Sure. As far as ASP, it is a bit challenging to calculate off of quarterly financials in that we are doing percentage of completion revenue, revenue recognition and one thing you do have to keep in mind is that the kits is really only less than half of the overall sale of a power plant. So while POSCO is a large component of our revenue, [or other] sales price that -- in that they are just buying kits from us that will drive down the ASP.

I would say that we have significantly increased the revenue from complete power plants with the Bridgeport project and other activity in the US which has driven, obviously, incremental margin and we have added onto that. Bridgeport is more than just a product sale. A large percentage of that project is also EPC services as Chip talked about in his prepared remarks.

So, that is coming through incrementally as we are performing construction services at the site as well. So we are very pleased with the revenue mix that we have now and certainly expect to continue to add complete power plants and additional services like EPC and ancillary services at existing customer sites here into the future.

And I just want to build on what Mike said and give you a little bit of forward thought here. I said 30 megawatts of closure that Sanjay was asking me about. I mean that would be primarily domestic business.

So as Mike said those domestic orders, a lot of that would be turnkey type projects. So what you are referring to as ASP would go up substantially and of course that would also -- if you looked at our backlog -- then it would change dramatically that mix we just talked about.

And the other thing I would say is that our model is changing somewhat as well. If you look at the improvements in the balance sheet we made. If you look at the access to financing the NRG agreement, what this really says is we are in closure mode at the moment in terms of order closure. And we are also seeing in part of our model here is to reduce the time to build the project from contract. Because that minimizes the cost of construction debt.

So our business model is to have, if you will, a rapid response once we have order closure. When you bring the financing, you get the order closure. So that is kind of a little bit of change in the model in the past which was, as Mike said, a lot of kits which were longer lead time or bigger backlog. So we expect the backlog turnover to change with -- as we go forward.

That's very helpful. Thanks. And one housekeeping follow-up on one of the previous questions.

In terms of capacity next year, it sounds like you will get to that 100 megawatt number here in North America. What should I assume for CapEx on that? It sounds like it is going to be sort of a similar run rate to this year. Is that correct?

Yes. CapEx, you would assume that it is similar to this year. It is really some process improvement, some additional efficiencies in the factories, some automation and then a fair amount of maintenance capital.

Great. That is all for me. Thanks.

I am showing no for the questions at this time. I would like to hand the conference back over to management for any closing remarks.

Well, I would like to thank everybody for their questions and attending on the call today and we look forward to seeing you on the next compass 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.