燃料電池能源 (FCEL) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the FuelCell Energy reports first-quarter 2014 results call.

(Operator Instructions). As reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Kurt Goddard, Vice President of Investor Relations. Mr. Goddard you may begin.

Good morning and welcome to the first quarter of 2014 earnings call for FuelCell Energy. Yesterday evening, FuelCell Energy released financial results for the first quarter of 2014. The earnings release, as well as the 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 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'd like to turn the call over to Chip Bottone. Chip.

Thank you, Kurt. Good morning everyone and welcome. Please turn to slide 4, first-quarter 2014 highlights.

We achieved historic milestones with the on-time completion of two large high-profile fuel cell parks in North America and Asia. Both projects are receiving worldwide attention from utility another prospective customers, and contributing to heightened interest and demand for ultra-clean distributed generation solutions.

POSCO Energy, our South Korean partner, is on schedule with the construction of its manufacturing facility. At the same time, our associates are continuing to implement process improvements at our North American manufacturing facility. These refinements will further contribute to lower costs and higher operating leverage, while increasing our ability to meet growing demand.

Inquiries and activity levels were strong and our commercial organization is intensely focused on converting pipeline into backlog. My confidence level is high as we are in the final stage of closure on many attractive projects.

The multi-megawatt projects involve large dollar amounts and multiple levels of approval, so they take time to appropriately structured and complete. I will discuss our results and outlook and 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 first quarter of 2014 of $44.4 million and compared to $36.4 million in the same period last year.

Product sales for the first quarter totaled $34.5 million compared to $29.1 million reported in the prior year. POSCO Energy ordered 3.7 megawatts of fuel cell modules during the first quarter of 2014, of which 3.4 megawatts were shipped and revenue was recognized.

The final product and EPC revenue from the Bridgeport project was recognized during the first quarter of 2014 as that project entered commercial operations in December.

Serviced and license revenues for the quarter totaled $5 million comparable to the prior year quarter. Advanced Technology contract revenues totaled $5 million for the first quarter of 2014 compared to $2.3 million for the prior year quarter, as revenue was recognized for the data center project in Wyoming, and it was an increased level of activity under the US Department of Energy SECA -- solid oxide fuel cell program.

Total gross profit was $2.2 million for the first quarter of 2014 compared to a gross loss of $2.3 million for the first quarter of 2013 from the gross margin in the quarter was 4.9%. Our continued focus on cost reduction is evidenced by comparing sales and gross margin sequentially, as sales for the prior quarter were higher than this current quarter, yet the gross margin percentage was lower at 4.7%. We continue to take cost out of our products and are diversifying the revenue mix.

Total operating expenses were $9.8 million for the first quarter of 2014 compared to $8.8 million in the prior year period. Research and development expenses increased year-over-year, partially offset by lower administrative and selling expenses. The increase in R&D expenses reflected market development activity initiatives for Europe, combined with continued initiatives that further reduce costs of multi-megawatt installations by consolidating certain aspects of the power plant to achieve economies of scale. These cost reduction efforts are designed to further improve project economics for our pipeline.

Net loss to common shareholders for the first quarter of 2014 was $11.4 million or $0.06 per basic and diluted share. On an adjusted basis, which excludes the net expenses related to the conversion of the 8% convertible notes during the period, the adjusted net loss attributable to common shareholders totaled $9 million or $0.04 per basic and diluted share. This compares to $12.5 million or $0.07 per basic and diluted share for the first quarter of 2013.

EBITDA, which is a measure of cash flow and is based on earnings before interest, taxes, depreciation and amortization totaled negative $6.3 million, an improvement from the negative $9.9 million for the comparable prior year period as a result of lower cost from increased production volume and sales mix.

Now I will transition to slide 6, titled financial metrics. Cash and cash equivalents, including restricted cash, totaled $104.6 million at January 31, 2014. Net cash used by operating activities in the first quarter of 2014 was $5.1 million. Accounts receivable decreased from the prior quarter as we collected the final milestone payments upon completion of the Bridgeport fuel cell park.

The fuel cell park was constructed on time and we have collected the receivables from the sale and installation of the power plant. Let me also highlight a strength of our business model, which is that we now have a long-term recurring service revenue stream from this project as we operate this plant for Dominion over the next 15 years.

The Company completed a public offering of common stock during the first quarter, raising approximately $30 million. The proceeds will be used to enable multi-megawatt project development and construction activity on our projects in the pipeline.

Depreciation expense for the quarter was $1.1 million and capital spending was $800,000. Backlog totaled $327 million as of January 31, 2014, compared to $428 million a year ago and $355 million sequentially at October 31, 2013. Backlog includes product sales orders of $145 million compared to $260 million one year ago and $170 million at the end of the fourth quarter of 2013.

Service backlog was $165 million at the end of the first quarter compared to $150 million at January 31, 2013, and $167 million at October 31, 2013.

Advanced Technology contract backlog was approximately $17 million at the end of the first quarter 2014 compared to $18 million one year ago and $19 million at October 31, 2013.

Measured in megawatts, product backlog totaled 95 megawatts as of January 31, 2014 compared to 151 megawatts one year ago and 107 megawatts at the end of the fourth quarter of 2013.

During the first quarter we shipped 16 megawatts of fuel cell kits and fuel cell modules.

Project finance activity in the first quarter was strong. We have multiple paths to execute on near-term projects in our pipeline, including direct sales to utility and corporate customers as well as financing through long-term power purchase agreements. Our agreement with NRG Energy provides for deployment of our projects at customer sites, and NRG owns the asset and writes the long-term PPA.

We are actively engaged with NRG on multiple megawatts of opportunities in our pipeline, and are pleased with the progress that the partnership has made since signing our agreement last September.

In conclusion, we are well-positioned for further profitable growth of the business. We expect continued cost reduction and leverage at our current 70 megawatt production run rate and an improving revenue mix from increased activity in the US and Europe, which will lead to additional margin expansion during the year.

We are targeting positive quarterly cash flow as measured by EBITDA by the end of 2014 based on anticipated order flow, improving revenue mix, continued cost reductions and leverage.

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 7, global operations execution.

During the first quarter, we maintained a 70 megawatt annual run rate at our Torrington, Connecticut facility, consistent with the third and fourth quarters of 2013. Based on our near-term order flow projections, we plan to maintain this production rate and will increase it as demand dictates.

To reduce product cost and increase margins, we are continuing to automate and improve our manufacturing processes. For example, during the first quarter of 2014 we implemented the use of an automated laser weld cell in our North American manufacturing facility in Torrington, improving quality, increasing throughput, and enhancing job satisfaction for our associates. Laser welding lowers costs and is faster than plasma welding, so the implementation of the laser weld cell equipment increases the annual capacity of the manufacturing facility.

Previously, we had been using plasma welding equipment to weld both the edges and the corners of the individual fuel cell components. We are now using the automated laser weld cell on corners of the fuel cell components. Over the next year we will be replacing remaining plasma welding stations with laser weld cells in a staged manner.

POSCO's new manufacturing facility in Pohang will use laser welding equipment exclusively as we implement best practices from the Torrington facility and the South Korean facility. Previous process improvements such as these have already made it possible to increase the total annual capacity of the North American manufacturing facility to 100 megawatts within the existing footprint of the building, an increase of 30 megawatts over the last three years. In addition, these types of process improvements drive the margin expansion just discussed by Mike Bishop.

During the first quarter we announced the on-time completion of the 4.9 megawatt Bridgeport fuel cell park and its acceptance by a Dominion. This project is now in commercial operation and is delivering clean baseload power to the Connecticut grid.

Dominion and the other stakeholders, such as the city of Bridgeport and the state of Connecticut, are thrilled with the outcome and the performance of this project. All are encouraging and supporting us to do more.

Other parts of the US and the world are using this type of project as a model on how utilities and large users should look at large-scale distributed power generation. The importance of executing on this project cannot be overstated. It provides high profile validation of distributed electric grid support delivered economically and cleanly.

The project also showcases our ability to deliver and execute a broad and complex project with numerous stakeholders, as three different electric utilities were involved in this project.

While prominent fuel cell parks like these demonstrate our clean energy solution's suitability for grid support, other projects are nearing completion that will reinforce the attributes of our on-site distributed energy solutions.

The 1.4 megawatt power plant installed at Hartford Hospital in Connecticut starts the commissioning process shortly. By early April the unit is expected to begin supplying ultra-clean electricity to the hospital and steam to both the hospital and the district heating system supplying buildings in the downtown area.

Our carbon neutral powerplant installed at Microsoft Data Research Project in Cheyenne, Wyoming, is presently undergoing commissioning. Once operational, it will demonstrate the effectiveness of using our fuel cell power plants to efficiently utilize on-site biogas to power datacenters in a sustainable and zero carbon manner.

The fuel cell powerplant installed inside the prestigious Fenchurch office tower in London's financial district is expected to be commissioned during the second quarter of 2014. Construction on the office tower is nearing completion and the powerplant will begin providing ultra-clean energy and heat for environmentally conscious tenants working in the complex.

In February we announced completion of the world's largest fuel cell park, containing 21 of our fuel cell plants, providing 59 megawatts of power to the grid and heat to the district heating system. The installation was constructed in only 13 months by POSCO Energy, and the fuel cell components produced in our North America facility.

The project demonstrates the speed with which our scalable, distributive generation solutions can be deployed to reduce grid congestion and help utilities comply with the clean energy mandates.

To meet growing demand for stationary fuel cell power in Asia, POSCO's constructing a state-of-the-art fuel cell component manufacturing facility in Pohang, South Korea. Following the groundbreaking ceremony on November 22, construction is progressing quickly.

The facility is approximately 30% complete and is on schedule. The facility will have a starting annual capacity of 100 megawatts and will have a total capacity of 200 megawatts. The capacity can be expanded as demand supports and the facility is expected to be operational in 2015.

The Pohang facility is being built by POSCO, leveraging our partner's strong financial resources. It testifies to POSCO's long-term commitment to the market in expectation for significant market growth in Asia.

Please turn to slide 8, localized manufacturing. This rendering depicts POSCO Energy's growing manufacturing campus in Pohang, South Korea. The recent photo in the upper right, highlighted with the green border, shows the progress of construction for the state-of-the-art fuel cell component manufacturing building that is being built.

When completed, POSCO Energy will have the capacity to build the entire fuel cell powerplant, including manufacturing of fuel cell components and stacking them for complete fuel cell modules, plus manufacturing the supporting balance of plant components. POSCO is also active with research and development, working with us to further reduce product costs, enhance manufacturing efficiencies and target new markets such as the building applications market.

Please turn to slide 9, business activity overview. Our success with multi-megawatt fuel cell parks and megawatt on-site power projects is demonstrating to utilities and large well-known customers that fuel cell powerplants are viable sources of clean, efficient and reliable distributed generation that support the electric grid and enhance grid resiliency.

These projects now bring economic value to end-users, project financers, public stakeholders and our Company. As a result, the landscape of our North American market is broadening. With a successful track record, talented team and partners, and access to lower cost of capital, we are very excited about our future and the ability to drive the Company growth.

We are actively bidding on utility RFPs using fuel cell parks and Asia manufacturing as points of validation. The progress made to date by executing on various strategic initiatives positions us well to pursue these type of large-scale grid support projects.

In addition, we are targeting on-site power generation applications in a number of states, including projects with NRG Energy under a co-marketing agreement. Our sales team has been very active in NRG, and our products are now part of NRG's baseload distributed generation offering to their customers.

In Asia, Seoul City in South Korea continues to installed new and renewable power generation as part of its [VOLT] plan to achieve greater energy economy, independence and safety. Using fuel cell components manufactured by us, POSCO Energy will supply seven 2.8 megawatt P&C powerplants for a 19.6 megawatt fuel cell park to be constructed at a railroad depot.

Configured for combined heat and power operation, the park will provide ultra-clean energy to the electric grid and usable, high quality heat to a district heating system. In the event of a grid disruption or outage, the fuel cell park will provide power to the adjacent railroad depot. The fuel cell park is expected to be operational by the end of 2012 -- 2014. The power output of the park will be adequate to power approximately 45,000 South Korean households.

Seoul accounts for more than 10% of South Korea's total power consumption. It generates only 3% of its power locally, with less than 2% of it now from new or renewable sources. To meet sustainability goals and power reliability expectations, the city has begun implementing its forward-looking One Less Nuclear Power Plant initiative.

The purpose is to provide replace the powerplant outlet of one nuclear plant with new and renewable distributed power generation, including multiple fuel cell parks. The initiative will allow Seoul to become more energy independent and secure while generating electricity economically.

During the first quarter, we sold two 1.4 megawatt and three 300 kilowatt fuel cell modules to POSCO. These modules will help our partner meet growing demand in Asia, including the newly developed commercial buildings market, and are in addition to the monthly shipments under the existing 122 megawatt order signed in 2012.

We expect South Korea's energy policies will expand the large commercial buildings market. Our fuel cell solutions are ideally suited to this market. And attributes such as the economy, combined power capability and clean, quiet operation allow for installation inside buildings.

We are progressing in Germany on a number of fronts and are witnessing growing interest from the Italian, UK and Middle East markets. To support our market development, we recently invested in some product development activities to address these specific market needs. We have increased our leadership role in Europe with several recent Board membership positions within the EU.

Utility challenges in Europe are immense and we have significant interest in the solutions and business model that have already been introduced in North America and Asia. Our German-based FuelCell Energy Solutions is being recognized as innovator and I expect we will see further order progress in 2014.

Among other strong commercialization potential, our advanced technologies group is developing distributed hydrogen systems designed to reduce the cost of hydrogen for industrial and fueling applications while providing the benefits of on-site generation. In addition to ultra-clean electricity and usable high quality heat, our versatile DFC-H2 generates hydrogen at the point of use in a solution that is cost competitive and easy to cite.

To showcase the power generation capabilities of our DFC-H2 for industrial applications, we're installing a DFC-H2 at our Torrington manufacturing facility by the end of 2014 under a program with the Advanced Manufacturing Office of the Department of Energy. Once in service in Torrington, the DFC-H2 will provide hydrogen to support our manufacturing processes while the high-quality heat will contribute to facility hitting, and the ultra-clean base level electricity will support around the clock production.

With this first of kind installation, we will demonstrate the potential market for distributed hydrogen used for industrial processes delivered economically, efficiently and cleanly by our existing technology. We estimate the potential size of the market for the tri-generation DFC-H2 at $1.6 billion in the US alone for both industrial and transportation applications.

On-site production eliminates delivery expense, a large part of the cost in industrial gases. In addition to multiple on-site product of revenue streams, the DFC-H2 adds value through process flexibility as the owner can generate more hydrogen and less electricity or vice versa, depending on which is more valuable based on local prices.

The DFC-H2 has been operating successfully at vehicle fueling stations in Cotton Valley, California since 2011, demonstrated sustainability for vehicle fueling market. In this application the DFC-H2 simultaneously generates ultra-clean energy and biogas and renewable hydrogen for vehicle fueling.

Please turn to slide 10 summary. We remain on track for delivering multiple megawatts of orders in 2014 as we push to EBITDA positive operations this year. On-time multi-megawatt fuel cell park completion support our marketing outreach and validate our solutions and service offerings for a global audience. Utilities and other prospective customers are responding with a growing number of inquiries and solicitations.

Our product solutions are versatile. We have multiple market opportunities available that we are selectively targeting, which will lead to continued growth of the business.

POSCO was on schedule, constructing its new manufacturing facility in South Korea. We are maintaining a 70 megawatt production rate at our Torrington facility while making continuous process improvements, positioning us to meet demand from expanding markets of North America, Asia and Europe.

In closing, I'd like to thank our associates for the commitment and innovative spirit and thank all of our customers, investors and stakeholders for your continued support.

Operator, we'll be happy to take questions at this time.

(Operator Instructions). Aditya Satghare, FBR Capital Markets.

I had two questions here. Your Bridgeport -- the Bridgeport powerplant is one of the prime examples of how to implement large-scale power plants. Now in terms of the conversations you are having with the utilities now, what is -- what are some of the key barriers you think we have to overcome before we see some large-scale adoption of power plants like this, and what has changed in terms of that conversation?

This is Chip. Good morning and thanks for joining. Yes, so, a lot of times typically with utility scale projects that's 15 megawatts. That was the first of its kind like that.

It was financed and all those kinds of things, and I think there's a lot of people that wanted to see that done first and then go from there. So, frankly, we have had a lot of visitors to that site, and having a place people can go to or point to makes the conversation a lot easier.

Now having said all that, then people say okay, that's exciting. I understand the concept of distributed generation. We understand that you can be competitive in doing that. Let's talk about projects.

So it's really led us into a lot of different opportunities that are under development. And it takes a little bit of time, as I said, to develop those opportunities. But I have no doubt that from a risk perspective, that is off the table for these people now. They can see it, touch it and see it. And then from a financial perspective we can be very competitive in these solutions today.

Got it. My second question was on cost reduction. So could you elaborate on some of the key steps you are taking to reduce costs, especially as you look at global procurement options and leverage the POSCO relationship?

Yes, another great question. So, I will give you the strategic answer and then a detailed example. But one of the things that we recognize is that we needed to have a uniform global supply chain based on one common global technology platform. And that was really critical to be able to achieve the cost reduction.

Frankly, it's lower volumes than people one-time expected. So that's really what we've been working on, and we are seeing the results of that right now even though we're running at a 70 megawatt rate. And, as we've mentioned before, we can see dramatic further improvements as we go from 70 megawatt on up.

So, all of the bases -- the same common parks, the very diligent procurement process, all of that is in place. So that's happening as we speak.

Now the second thing we are doing, obviously, is looking to get leverage from the operations we have. So, we have seen cost reductions, frankly, come on the product side of DT, which is really a function of that supply chain work that our team has done a great job with, increasing volume. And, of course, we're getting the benefit of leverage with that volume as well.

Right. Thanks. That's all I had.

Jeff Osborne, Stifel.

Congratulations on the strong results; really just two questions for me, Chip. One is six months into the NRG relationship, maybe just you seem pleased with the status of that in the activity level. But is there a way just in hindsight that you can bring us up to speed as to what's been accomplished thus far in terms of integration and training?

And I assume there's some leverage once PPA documents are drafted up for one type of customer, that a lot of that is duplicative. But given they don't have experience in fuel cells, is that the challenge in closing business sooner rather than later there?

All start, then maybe Mike has something to add to that. Welcome and thanks for joining.

None of these things happen overnight, right? You mentioned training. There's some of that. And as you know NRG has both an IPP business as well as a retail business, which fit with how we play as well, when I was talking about two different models there.

But there was exactly what you said. We did some education. We shared, okay, what about this customer? What about that customer? We have had to develop documents like PPA documents. We're working on, frankly, the optimum financial structure right now.

It's not so much that we need access to capital. It's how do we minimize the cost of capital on these transactions.

So, what I can tell you is that they are very supportive at very high levels of NRG. They have people on the ground. Our people go into sales calls with them jointly. Their logo, our logo is on the same proposal, and they have added some real credibility, frankly, to some of these transactions we're going to be closing here shortly.

So, not just in learning on both sides, but just the fact that NRG is quite an experienced player, particularly in power generation. So, it has taken a little bit time, that's true. Our expectation always was it would take a little time, but we need to do it right.

And we really are trying to set up a model financially and otherwise, Jeff, that's repeatable. So, while it takes a little bit time to get going, this thing has a lot of legs once we get going and get it going right. Mike, do you have anything to add to that?

Jeff, this is Mike. I would echo what Chip said, and with -- the sales teams are working very closely together and that extends to the commercial teams. Project finance teams from both companies are very active in, as Chip said, structuring PPAs and getting a model here that can be leveraged going forward.

That makes a lot of sense. I just had two more questions. One is as you look at the pipeline of utility projects that you are looking to close this year and next, how do we think about the mix of the sale of the hardware side and someone else is doing the EPC work versus the EPC development work being done internally by FuelCell Energy, given the success that you had in Connecticut?

Jeff, this is Chip again. The model that we have going forward is that we will do as much of that as practically possible. And that seems to be -- that's good for us from, obviously, a revenue perspective, but the customers like it as well. And certainly financers like one person to do the work.

We found out -- we have learned a lot of things. We have done some engineering to make things easier to do over time, and we can do it pretty efficiently with low risk. So our model really is about developing the opportunities, developing the right financial structure with the lowest cost of capital, and, obviously, the best return for the end-user, and basically doing it and then operating the plants for long periods of time.

And that seems to be, not just in the US, but we have introduced that model in Europe. Asia has had that model. POSCO started with that model, and that's accelerated things, because it really gives people confidence that there is nothing that they don't have to account for. It allows them to reduce some contingency risk they might have in the past put in projects. The permitting issues go away. So, from a timetable perspective, it gives some certainty.

So our model is to do it with our own team. Not to say that we wouldn't have local contractors do specific construction, but those would be people that we know and we have done business with before.

Excellent. The last question I had is just given the stock price performance recently, a common request we're getting from investors is just how you go about attempting to size the potential market? Obviously, having baseload power at $0.10, give or take per kilowatt hour, with where natural gas is today is very impressive, but how do you answer that question for people? Looking at the FERC data of new solar and wind being added, those are slightly lower from a cost perspective, but obviously have the intermittency issues that you folks don't have.

So, just looking for some advice on how you internally look at your 600 megawatt pipeline that you referenced on the last call relative to the total hunting availability of land that you can go grab, so to speak?

Jeff, Chip again. So, there's a couple of things in there. Number one is natural gas certainly has helped. It went up during the wintertime, but as you can see it starting to come back down. And if you look at the futures it is perhaps even lower than what we targeted, which was about $6 to $8 gas, number one.

But, really, the price of the fuel is only one-third of what we are doing, so as we focused on reducing the EPC costs and the financing cost and the period of installation, which reduces the financing costs, all those things have really attributed to us lowering the price that we can produce power for and be competitive with some of those other things.

Now, we get -- a question may come up can you compete with wind and solar? Frankly, we complement wind and solar. In some cases their prices might be higher in different parts of the world than they might be in a specific place. But, obviously, we can put these plants where the utilities need them most, which is the load pockets and things.

So, this whole utility model that we introduced that we introduced a year ago or so ago, and going after things like Bridgeport has opened up the market a lot. So, candidly we are seeing ourselves the competitive on these larger projects. And in the past we never even pursued them.

So, it's a little bit of an education process, depending on the utility. But we are seeing more of that, Jeff, than less. And now we need to close some of those and then move on, because those things are big and they span multiple years even.

So, we don't want to -- we want to focus both on the on-site behind the meter as well as these broader project opportunities, and as it sits today, we think the whole market is about $12 billion. As we mentioned before, as we add some things like the hydrogen thing, which we said was $1.5 billion or so.

But, no, there's a little bit of an education process, but we're being able to be more competitive. Cost of capital is coming down, and I feel really good about us being able to compete in the future, or currently and certainly into the future.

Excellent. Just one quick follow-up. Is there a way you can put it in perspective maybe without giving absolute numbers if you don't want to, about the cost of capital improvements relative to 18 months ago? Were you in the teens, high teens and you're sub-10% now? Or just a ballpark would be helpful.

Yes, hi, Jeff, it's Mike. So, yes, certainly over the past year and a half, and as we have gotten validation of not only what POSCO continues to do, but also what we are doing on the ground here, second source of supply, that type of thing, we have seen project financing come down. I'm not going to give you an exact percentage, but a couple hundred basis points over what we were looking at last year.

We certainly feel like we are very competitive in project financing offerings for our products.

Excellent, thanks so much. Good luck.

Rob Stone, Cowen and Company.

Thanks for taking my questions. I wanted to follow up on the comment about recurring revenue from Bridgeport. How should we think about the service and license revenue run rate now that Bridgeport is up and running? And I had a couple of follow-ups also.

Hi, Rob, good morning. Thanks for joining the call. This is Mike. So, Bridgeport is a great model for the Company and really indicative of future service agreements. It's a 15-year, long-term service agreement that we have with Dominion. That revenue gets recognized over the period of the next 15 years.

From how that flows through the financial statements perspective, there is a portion related to just routine maintenance and operations that gets recognized ratably over the term. And then as we do module exchanges at five years and seven years, a larger portion of the revenue gets recognized.

But was there much in Q1 from Bridgeport?

That project came online at the end of December, so you really only had about one month of revenue recognition related to that.

So there should be a step up in the run rate. My next question is on the gross margin outlook. Obviously, one of the big drivers is going to be higher volume as these orders come in. How much do you think you can improve gross margin from some of the other cost reduction activities while you are still running at the 70 megawatt run rate?

Rob, this is Mike again. So, we see continued improvements in gross margin as I talked about in my script, as we bring new orders online. Keep in mind as we add to our backlog now, these will be complete power plants, which can include EPC work as well. So you are getting the benefit of the full power plant.

As we model out the business, we have talked about EBITDA positive end of 2014. We are looking at margins in the low teens as we approach that at the end of this year.

Okay. And a final question for Chip. You talked about a lot of orders that have been negotiated or imminent, final customer and/or regulatory approvals. Can you provide any color on what sort of regulatory hurdles there are, and if that, too, is something you can make a repeatable activity? Thanks.

So let me just explain the process a bit. It's not so much obstacles. What we try to do is, first of all, we don't release are talk about things until we have everything signed off on -- money, et cetera, et cetera, and then we do the development work necessary.

So, as soon as we get a signed contract that we make public, we're off executing that. So, you can imagine that a lot of stuff has to be set up before you start that.

So, when I mention things like regulatory process, it's not necessarily a bad thing. It's just certain sign-offs have to be done. But a lot of these projects really go to boards, whether it's the municipality board, university board or Independent company boards, because of the kind of dollars involved.

So it's really more that process that I can say that we have projects developed. We have financing arranged. We have engineering done. We have site control that we are waiting to just get through the process, because that's just -- it's the nature of the size of these projects.

The minimum project size is $5 million. And more likely, the projects we are talking about per project without the service piece, which doubles the revenue potential, is probably more in the range of $10 million to $20 million.

So, it's not a problem. It's just time and that's the way we like to run. That's our business model, is once we get the contract we are off and running. We coordinate very well with our production plan and, as Mike said, the forecast.

So, can you comment at all on what maybe the cycle time is for just the regulatory approval part of it? (multiple speakers)

Inventory isn't really the biggest issue. Rob, don't forget, most of the projects -- not most -- but the projects we do really don't have extensive permit requirements. So, on the regulatory side, unless there is some significant interconnection, which generally when we do projects, we're not talking about transmission or major investment. That is really not the timing.

It's just really more the financial approval, even in a case of power purchase agreement commitments, from company boards and municipality boards.

Okay --.

Typical from -- you start something tomorrow, and until you finish -- you get that go ahead -- it could be, I would say, no less than nine months and more likely 12 to 18 months. So that's why we have got this pretty large pipeline, because you are developing multiple things and then you fit them into the timing slot.

My final question is on the hydrogen generation. You mentioned the potential North American market opportunity. Is that something where you are also seeing meaningful interest in markets like Europe for baseload plus heat plus hydrogen?

You are exactly right. That number that we laid out there was not even Europe. But, in fact, the interest in Europe is as high if not higher than in North America. We just happened to start in North America first, because there was some interest particularly in California early on with hydrogen vehicles that then spread to basically on-site industrial gases.

But, yes, it's interesting. It's the same technology with some modification, so it wasn't a big R&D effort. But it's a pretty significant game changer when you think about distributed hydrogen as compared to what typically happens today, which is you produce it somewhere and put it in a truck and deliver it in a liquid form and then vaporize it.

So, we're going to get -- what we're going to get some partners that we are working with right now on other projects that we have proposals in for, on actually megawatt scale things as well. So these pilots -- successful pilots so far, but we expect -- we have a lot of interest already in Europe as well as in North America.

Oh, so, you don't necessarily need to complete the demonstration in Torrington to see inbound opportunities elsewhere?

No, exactly right. The demonstration in Torrington is really about hooking it into the factory and the furnace and the economics of it, but as far -- from a technical perspective, we have got proposals in for megawatt scale projects right now that we are under negotiation on. So, we are not waiting on that.

Excellent, thanks very much.

Adam Krop, Ardour Capital.

Just (multiple speakers) -- a couple of housekeeping questions for me. You talked about 70 megawatts being maintained in the manufacturing facility. Can you talk about your CapEx expectations for the year and how that may be affected by the new laser weld? And just your expectations for 2014 would be helpful. Thanks.

Good morning, Adam, it's Mike. Yes, our CapEx expectations for this year are in the $5 million to $7 million range. And it's really a combination of the laser welding as Chip talked about in his script, and maintenance capital; really not a lot of CapEx pending. Really minimal CapEx pending required to ramp further from where we are today.

We have 100 megawatts of capacity in our Torrington facility, and currently we are running at 70 megawatts [being low] volumes.

Okay, thanks. And then on the R&D expense for the year, should we expect that to trend what we saw in the first quarter, maybe step up a little bit as you are building out some of your -- the R&D opportunities that you are talking about?

Adam, this is Mike. I'd say R&D for the year will be around the level you saw in the first quarter. We are really targeting total operating expenses for the year to look a lot like last year, maybe up modestly during the year. But operating expense profile similar to last year, a slight increase; really looking to get leverage out of the operating expense line this year as we continue to grow the business.

Okay, and then just lastly, with the new share conversions what should I be looking for, for total shares outstanding in the second quarter? Is 218 million about the number that you are thinking?

Total outstanding shares as of today is about 253 million shares, and that includes the conversions and the offering in the first quarter. If you are thinking about modeling weighted average shares that will be less, but that's the current outstanding shares now.

Okay, great. Thanks very much.

I am not showing any further questions in the queue. I'd like to turn the call back over to Mr. Chip Bottone, CEO.

Thank you very much, everyone, for joining today and thank you for the great questions. Thank you for your support and we look forward to seeing you on the second quarter call here. Have a great day. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.