燃料電池能源 (FCEL) 2014 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to FuelCell Energy's fourth-quarter 2014 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, ladies and gentlemen, this conference call may be recorded. I would now like to turn the conference over to Mr. Kurt Goddard, Vice President, Investor Relations. Sir, you may begin.

Good morning and welcome to the fourth-quarter and fiscal year 2014 earnings call for FuelCell Energy. Yesterday evening, FuelCell Energy released financial results for the fourth quarter and fiscal year 2014. 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'd like to turn the call over to Chip Bottone. Chip?

Thank you Kurt. Good morning, everyone, and welcome.

Please turn to Slide 4, 2004 (sic -- see press release "2014") highlights. We executed on a number of key strategic initiatives in fiscal year 2014, particularly our positioning with utilities as we delivered a 15 megawatt FuelCell product on schedule to one of the largest utilities in the US, partnered with the largest independent power producer in North America as they invested in the Company and added a new utility customer, closing three projects valued in excess of $70 million to date. During the year, we maintained a record 70 megawatt production rate in our North American manufacturing facility, selling all production as planned. Sales mix is improving but included fewer complete power plants than targeted. Margins improved with continuing material cost reductions and greater manufacturing efficiencies, while improving both sales mix and margins will be targets for continued improvements for 2015.

Services are a market differentiator for us, an increasingly important component of revenue diversification, growth, and increasing profitability. Our services business today is modestly profitable and trending favorably. We look to accelerate this trend during the coming year.

Recently, we announced expansion plans for our North American manufacturing facility. This is a multi-phase plan that will drive cost savings and provide flexibility for future growth. The Asian capacity expansion initiatives being undertaken by our partner, POSCO Energy, are on schedule and delivering the expected supply-chain cost leverage.

We strengthened market access through initiatives that included deepening our relationship with NRG Energy, including their direct investment in the Company and the execution of a $40 million project finance facility. This partnership is validating our products, services and business model as we work with NRG on a number of projects. These and other strategic initiatives are enhancing the overall affordability and competitiveness of the ultraclean solutions and services, allowing us to offer our solutions on high-value projects in key markets as we push to drive topline revenue growth.

I will discuss our markets 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 fourth quarter of 2014 of $54.4 million. This compares to $55.2 million for the prior-year period, or $45 million net of $10.2 million of one-time service revenue recognized in Q4 2013 from the master service agreement executed with POSCO Energy. For the fourth quarter of 2014, product sales totaled $42.4 million, service agreements and license revenues totaled $6.7 million, and Advanced Technology contract revenues totaled $5.3 million.

Gross profit of $6 million for the fourth quarter of 2014 reflects further margin expansion comparing favorably to $2.6 million for the same period last year. The gross margin percentage in the quarter was 10.9%, more than double the gross margin from the fourth quarter of 2013 of 4.7%. The higher margin in the quarter is reflective of an improved sales mix which included turnkey projects as well as continued material cost reduction and manufacturing efficiencies.

Total operating expenses were $10.9 million for the fourth quarter of 2014 compared to $9.5 million in the prior-year period. We have an increased level of commercial activity as we pursue multi-megawatt FuelCell opportunities with utilities, independent power producers, and industry. We are targeting operating expenses at this level into 2015.

Net loss to common shareholders for the fourth quarter of 2014 was $5.5 million, or $0.02 per basic and diluted share. This compares to $10.5 million, or $0.06 per basic and diluted share, in the fourth quarter of 2013.

Adjusted EBITDA, which is the measure of cash flow and is based on earnings before interest, taxes, depreciation, amortization and other income and expense, totaled negative $3.7 million for the fourth quarter of 2014, a significant improvement year-over-year compared to negative $5.6 million for the fourth quarter of 2013.

To summarize, our focus on the core operations of the business is supporting margin expansion, leading to improving EBITDA.

Please turn to Slide 6 titled "Fiscal Year Financial Highlights". Turning to full-year results, in 2014, the Company reported total revenue of $180.3 million compared to $187.7 million in the prior year. Gross profit nearly doubled to $13.7 million compared to $7.1 million for fiscal year 2013. This trend is important to highlight as, with basically flat sales year-over-year, we significantly increased gross margin. Execution on turnkey projects in the US in the second half of the fiscal year led to expanding revenues and margins as illustrated on the middle column of this slide.

Net loss to common shareholders for fiscal 2014 was $41.3 million, or $0.17 per basic and diluted share. On an adjusted basis, which excludes net expenses related to the conversion of the 8% convertible notes during the year, the adjusted net loss attributable to common shareholders totaled $32.9 million, or $0.13 per basic and diluted share. Net loss to common shareholders in the prior year was $37.6 million, or $0.20 per basic and diluted share, or on an adjusted basis, $36.2 million or $0.19 per basic and diluted share.

Now I will transition to Slide 7 titled "Financial Metrics". Total liquidity at October 31, 2014 was $151.9 million consisting of cash and cash equivalents, including restricted cash of $108.8 million, availability on the JPMorgan revolver of $3.1 million, and availability of $40 million on the project finance facility extended by NRG. In comparison, total liquidity at the end of 2013 was $79.2 million.

Accounts Receivable increased $10.9 million in Q4, reflecting orders closed towards the end of the quarter. This cash is expected to be collected in the first quarter of 2015. Total inventory of approximately $56 million at October 31, 2014 was consistent with the third quarter. Substantially complete power plants and inventory are expected to be deployed in 2015. During the fourth quarter and for the fiscal year, we maintain the annual production volume at 70 megawatts, which was a record level for the Company.

Total backlog was $333.9 million on October 31, 2014 compared to $355.4 million at the end of fiscal 2013. Backlog includes product sales orders of $113 million, or 72 megawatts. Service backlog increased to $197 million at October 31, 2013 compared to $167 million at the end of fiscal 2013. Advanced Technology contract backlog was $24 million at the end of the fourth quarter compared to $19 million at the end of 2013. Subsequent to year-end, the United Illuminating contracts added approximately $31 million to backlog. These included a 3.4 megawatt turnkey project and a 20-year operations and service agreement. In addition to backlog, the Company has developed a robust pipeline of projects which we expect to continue to convert to orders in 2015.

I will now turn the call back to Chip. Chip?

Thank you Mike. Please turn to Slide 8, positioning for global growth. We are undertaking a two-phased strategic expansion of our North American manufacturing facility in Torrington, Connecticut. This initiative will continue our cost reductions and position our company for future expected growth. We are undertaking this expansion now based on increasing activity levels in our key markets and are prudently leveraging low interest financing from the state of Connecticut. This expansion will contribute to greater operating flexibility and further cost reductions while the financing structure preserves capital.

As announced in October, Phase I adds 90,000 square feet, enabling us to streamline logistics functions, consolidate warehousing and reconfigure existing production processes to improve manufacturing efficiencies and realize cost savings. During Phase II, as demand supports, we will add manufacturing equipment to increase annual capacity from the current 100 megawatts to at least 200 megawatts. Phases I and II are eligible for a $10 million loan from the state of Connecticut at an interest rate of only 2% repayable over 15 years. Half of each loan is forgivable by meeting predefined job creation and retention targets. In addition, the expansion qualifies for up to $10 million in credits that we can use or monetize.

Expansion of POSCO Energy's growing FuelCell campus in Pohang, South Korea is progressing on schedule. The new manufacturing building is complete and production equipment is currently being added. The FuelCell stacking, balance of plant, R&D and office buildings were constructed in prior years. Local production of complete FuelCell power plant is expected to begin in mid-2015.

Global production of complete power plants in Asia provides many benefits. These include further validation of our ultraclean FuelCell solutions, reduced material cost through volume purchasing, the security of a second source of supply in multiple revenue streams, including services, as our company benefits from POSCO's market development efforts.

Widespread deployment of large-scale FuelCell products in South Korea continues. POSCO has commissioned or is nearing completion to almost 100 megawatts of new installations in 2014. Mr. Hwang, who was appointed CEO of POSCO Energy last spring, visited Danbury and Torrington earlier this month. His visit underscores the vital importance of our fuel cell technology to our Asian partners' business strategies. We are working together on a number of initiatives to further accelerate the growth in Asia, and also on global customers for which we are uniquely positioned.

As the graph on the slide illustrates, our and POSCO Energy's strategy ensures global production capacity will be available to support growth. In 2015, POSCO's new manufacturing facility will come online and add 100 megawatts of capacity to the global FuelCell manufacturing footprint. As such, our supply chain volume will increase up to 50% as production volume increases. In the midterm, Phase II of our Torrington expansion provides the opportunity to increase capacity further as dictated by demand, and POSCO's new building can accommodate up to 200 megawatts of annual production for a total global capacity of up to 400 megawatts.

Please turn to Slide 9, high-efficiency innovation. In September, I was invited to make a presentation at the American Gas Association's Executive Conference, an event attended by utility CEO and senior executives. This is an opportunity to explain how our solutions help utilities drive demand for gas while adding affordable and efficient distributed generation.

We recently announced a contract with UIL Holdings for an advanced hybrid fuel-cell power plant that we refer to as the direct FuelCell Energy Recovery Generator, or DFC-ERG. Our company recognized a sizable potential for this market and has been positioning to serve it. Utilities desire to drive demand for gas and increasingly recognize the value of efficient and affordable clean distributed generation. These factors are working in our favor and driving interest in our solutions. The UIL project exemplifies our execution on initiatives aimed at penetrating new markets with sizable global potential.

Easy to cite, the DFC-ERG drives demand for gas while utilizing utilities' existing infrastructure. The solution operates at about 62% average electrical efficiency up to a peak of 70% when gas flows are high and replaces combustion-based boilers needed to warm the gas. It enables utilities to add economically attractive and highly efficient clean distributed generation to their portfolios and achieve sustainability objectives.

I am pleased to announce for the first time another application advancement of our proven carbonate fuel cell technology platform. The high-efficiency fuel cell, as we refer to it, enhances the affordability of our solutions for targeted applications in regions by increasing electrical efficiency of our power plants. This product is particularly well-suited for utility and data center opportunities that value high electrical efficiency and may have only minimal thermal needs and locations globally with higher fuel costs. For these targeted applications, the levelized cost of energy, or LCOE, can be lower than our existing multi-megawatt configuration. Essentially, a multi-megawatt DFC power plant paired with an additional FuelCell module, the hybrid solution increases electrical efficiency 27% to 60%, well above the competing technologies in its class. Exemplifying the versatility of our core proprietary technology, these high-efficiency fuel cells use our existing component platform. We are in active discussions with prospective customers.

Please turn to Slide 10, market update. Our proprietary direct fuel cell power plants support two primary markets, on-site combined heat and power, or CHP, and utility grid support. We are in active discussions with prospective customers in multiple states for on-site CHP projects ranging in size from 1.4 megawatt power plants to 14 megawatt installations for large industrial operation. This includes the discussions with customers of NRG Energy.

Besides providing customer access, the NRG relationship has given us greater financial flexibility in proposing projects with the $40 million project finance credit line extended by NRG. We are currently developing projects where we expect to utilize this facility when the projects come to fruition.

Projects under Connecticut's low emissions renewable energy credit program are progressing. We have received awards for two projects for on-site CHP, both 1.4 megawatt power plants for commercial companies. We are currently working with two prospective customers to finalize contracts and hope to announce these projects in the spring of 2015. We received the third LREC award for the DFC-H2 that is beginning operation at our Torrington facility.

In our European served area, we are actively pursuing opportunities in Germany, the United Kingdom, and Italy. Our high-profile sub-megawatt installations at prestigious locations in London and Berlin are leading to an increase for megawatt class projects. Our efforts have resulted in renewed European recognition, specifically leadership and favorable policy trends. Recent announcement on utility companies' restructuring and transformation are favorable for us but took some time. Utilities' appreciation for the numerous benefits of distributed generation and our efficient ultraclean fuel cell technology is continuing to grow globally. And activity in our utility grid support market is continuing to increase, including discussions with European utilities.

Just last Friday, I received notice on one specific project for which we have contracts in close to final form enabling us to move forward. Others are in process as well. Existing utility relationships are helpful in building relationships in the utility marketplace. The Bridgeport FuelCell Park was completed on schedule and is meeting our customers' expectations. Dominion informed me that the Park's availability in excess of 90% is among the highest in its 23,000 megawatt portfolio. We received three contracts from United Illuminating in calendar year 2014 for more than $75 million of grid support applications. High-profile customers like Dominion and UI are validating our solutions and services in the utility marketplace.

The Company's proven engineering procurement and construction capabilities are enhancing our reputation for services and our availability to deliver large-scale projects on schedule. Our EPC capacities flex in response to growth and we are simultaneously constructing multiple projects.

Our expanding manufacturing capacity, successful project execution, world-class references, proven EPC capabilities and services place our company in an advantageous position. This is imperative when speaking to prospective utilities with projects valued at tens of millions of dollars with twenty-year terms. Building on this in large and strengthened foundation for growth, we are proposing utility scale project that we were not in a position to offer just a couple of years ago. Improved affordability and competitiveness, execution on projects, reference utility clients and strong global partnerships has now positioned us to bid competitively on utility scale projects. We are currently engaged in active discussions with multiple utilities in the US for projects in the 10 to 30 megawatt range.

Demonstrating utilities' growing desire to install significant quantities of clean distributed generation and our competitiveness, Long Island Power Authority, or LIPA, issued 280 megawatts of request for proposal for renewable generation. Along with our business partners, we have submitted best and final proposals to LIPA for multiple FuelCell parks of 19.6 megawatts each. Our LIPA proposals represent activity in New York, in new geographic markets, and highlights the suitability of fuel cells for densely populated and land constrained regions like Long Island. Clean distributed generation is valued there for many reasons -- high land values that support power generation on minimal footprint, transmission site challenges than support power production near the point of use, severe coastal weather that supports distributed generation's enhanced grid resiliency. Continuous power that is not depending on the weather or time of day is also valued.

Validated by the Bridgeport FuelCell Park, we believe that our proposals are very competitive and meet the needs of LIPA's ratepayers. LIPA is holding a public meeting tomorrow, December 17, regarding the proposals, although we are unable to comment on the expected timing of the utility's final selection.

Are growing pipeline is now in excess of $1.5 billion of potential project in North America and European served areas. Demand for FuelCell parks in Asia continues to be strong and our partner, POSCO Energy, continues to be actively engaged in developing this large market.

As I mentioned, services are an important market differentiator and provide many benefits for us. Services enhance the competitiveness of our offerings, keep us closely aligned with our customers, and are a growing source of predictable revenue. Most importantly, margins continue to expand as we exit early generation contracts and benefit from increasing volume that spreads the service infrastructure costs over a larger installed base.

As shown on this slide, $1 of product revenue drives $1 in service revenue for a 12-year project. This increases to $1.50 in service revenue for a 20-year project, term of a typical utility project which increases the addressable market by $3 billion. Our services business locks into revenue for extended periods of time.

Please turn to Slide 11, new markets. Our Advanced Technology group evaluates new applications for our versatile core technology and opens new markets with strong commercial potential. The Company's proprietary Direct FuelCell technology continues to demonstrate versatility in a variety of applications, including carbon capture and distributed hydrogen. Over a relatively short time, government funding has led to private sector interest and investment. We are enthusiastic about the private funding because it signals and validates the potential of these applications and should accelerate commercialization. Solving problems in adjacent markets with our technology offers additional opportunity for our shareholders by advancing the possibility of new revenue streams with only minimal further investment.

With regards to distributor hydrogen applications, the pace of Asian and European automakers announcing fuel-cell powered vehicles is accelerating, necessitating the need for the supporting fueling infrastructure. We have the only solution to supply truly renewable and affordable hydrogen at the same time having emissions profiles lower than any current or expected future regulations. During a successful three-year demonstration, our DFC-H2 has widely generated renewable electricity and hydrogen at a hydrogen vehicle fueling station in California. Distributed hydrogen production for industry is a multibillion dollar opportunity. We are demonstrating this market potential with a tri-generation plant at our Torrington manufacturing facility, generating ultraclean electricity and heat for the facility, plus hydrogen in support of manufacturing processes, while producing cost savings and demonstrating our commitment to sustainability. Both of these vehicular and industrial demonstration units are showcases for the versatility of our core DSA technology and we are pursuing megawatt class applications in both of these potential markets.

As shown on this slide, our carbon capture technology is developing rapidly. In October, we announced a multimillion dollar contract with a global energy company for our work to affordably reduce emissions profiles by integrating DFC power plants with combustion-based large-scale combined cycle power plants. Now in advanced stages of development, our technology is unique as an economically compelling carbon capture solution that generates rather than consumes electrical power. Carbon capture represents a sizable multibillion dollar market opportunity. As illustrated by recent headlines in yesterday's article in the New York Times, momentum is clearly building in this market. We see strong private sector support for carbon capture initiatives demonstrated by the recent signing of more than 200 companies with the Environmental Protection Agency's clean power plan. Additionally, the largest independent power producer in North America publicly committed to reduce carbon emissions by 90%.

EPA administrator Gina McCarthy recently became one of our many VIP visitors who have toured our high visibility Bridgeport FuelCell Park. The administrator, whose agency is working to strengthen clearer regulations, had an opportunity to learn about our power generation solution firsthand from Dominion and local legislative officials. Interactions like this are important as we grow awareness of how our products uniquely address energy, environmental, and economic policy and challenges.

I will turn the discussion back to Mike Bishop, our Chief Financial Officer, to discussed our outlook for 2015. Mike?

Thank you Chip. Please turn to Slide 12 titled "2015 Outlook". We will continue positioning for global growth in 2015, executing on new contract as well as our cost reduction and expansion initiatives. This will lead to increased competitiveness for our clean, efficient distributed generation solutions.

In 2015, we expect to continue production of 70 megawatts annually and sales growth will come from a mix shift towards multi-megawatt projects in North America and Europe, resulting in a smaller percentage of kits and modules. We are targeting average quarterly revenue in the range of $50 million to $60 million. Quarterly revenue may be variable depending on the timing of customer requirements for large multi-megawatt orders, which we expect to bulk during the fiscal year.

In 2014, we demonstrated our ability to expand margins even with generally flat revenue. With a more diversified sales mix in 2015, we expect margins will continue to expand and we are targeting EBITDA breakeven on a quarterly basis later in the year.

We expect to continue favorable profitability trends in the service business supported by three factors. First, the fixed cost of service infrastructure will be spread over or absorbed by the growing deployed fleet and an increasing number of service agreements. Second, we are winding down or concluding early generation service contracts that do not have attractive margin profiles. And third, we expect increasing royalty revenue from our partner, POSCO Energy, as the Asian market continues to grow.

In 2015, we also expect growth of our Advanced Technology applications as we validate the potential of our carbon capture and distributed hydrogen solutions. We expect to continue to attract additional funding from private industry which generally comes with higher margins than those supported by government funding.

As for operations, as we discussed, the annual capacity of our North American facility is currently 100 megawatts and we will begin a multiyear expansion in 2015. We will increase our factory production levels as backlog supports.

For 2015, we forecast capital expenditures in the range of $8 million to $15 million. The upper end of this range represents spending for automation equipment and expansion of Torrington that will either occur in late 2015 or early 2016. As we proceed with our Torrington expansion, financing from the state of Connecticut will partially offset CapEx spending.

In summary, our business is well positioned for further execution of our growth plans and achieving sustainable profitability. Operator, we will be happy to take questions at this time.

(Operator Instructions). Les Sulewski, Sidoti and Company.

Good morning. Thank you. Chip, you mentioned you received awards on two projects for on-site CHP. Can you discuss that and maybe other opportunities you see there?

Yes. I think you're referring to the comment I made about the LREC program in Connecticut. That comes out multiple times during the year. You bid into that, and you're then announced as the awardee of the LREC award. From there, we basically finalize the contracts. So, we actually got three contract awards. The one was our own as I mentioned in Torrington and we have two more 1.4 megawatt projects. So we are working on finalizing contracts with those.

And you mentioned that's north of $75 million in installations, is that correct?

No, no. So the $75 million comment was related to business we have in hand. That's the business we got from United Illuminating. It's about low $80s million in total revenue from those guys that we will derive. We already have those orders. We've announced those. What I was just talking about LREC is incremental to what -- people ask for a little more transparency about what you are working on, and so our effort there was to put that out there as other projects that we have and we're just finalizing contracts for.

Okay, got it. And then that $75 million, is that included in your backlog already?

The $30 million or so is not. Everything else is included in the backlog. The last project Mike mentioned came in right after the 10th -- or it came like the first or second week in November. So it actually would now technically be in our backlog. It wasn't in the full-year backlog. I think it was $30 million.

Okay. So then so looking at the reported product backlog, $113 million, that will be recognized as revenue over 2015. And then $31 million coming in next quarter, will that -- will you see that recognized as revenue for the full year, or how do you look at that?

This is Mike. Yes. The majority of that will be recognized in 2015 as we execute on that project for United Illuminating.

Okay. That's helpful. And then looking at the Advanced Technologies backlog, what was the driver there? It's a pretty significant increase sequentially, doubling.

This is Chip. You know, we have been working on some pretty big ideas for quite some time, and they were generally kind of smaller in nature. But as I mentioned in here, we've gotten larger contracts throughout this year which drove up the backlog. And it wasn't just larger. Actually, it was some different ones. We got more projects on carbon capture. We did some other things with salt oxide development, and some variety of other things that we proposed before but just got the awards. The activity level of that group is very, very high, and I highlighted two specific things which was really the carbon capture and hydrogen. So we would expect more project and investments from those going forward as well. I don't think it was just one year that we look at. We look at this as a very positive trend and want to continue this.

That's helpful. So can that potentially lead into full-scale projects?

Exactly. That's really the way this works is if you went back to the beginning, some of the early, early projects we did were somewhat demonstration in nature, and they turned into our core business. So we actually see carbon capture and hydrogen as being part of our core business in the future, but they would be megawatt scale projects right off the bat. You wouldn't do those in small-scale like we did on some of the other things. So there will be large tens of millions of dollars kind of projects, and if you take carbon capture, it's hundreds of millions of dollars of projects. So we've got some work to do, but this is -- we are getting some real good traction I think in those two additional new spaces for us.

Okay. You haven't tapped into the $40 million finance facility with NRG yet, have you?

We have not as of yet. We've got projects that we are working on that we may use that facility for those.

And that will be mostly projects centered around NRG, or is that to your discretion at other projects involved, or how do you look at that?

This is Mike. We can use that credit facility for any projects that we develop. You just have to meet standard project finance criteria, have a PPA with a good credit worthy offtaker and be proceeding down the development path. But it does not need to be NRG-specific projects.

Okay. And Mike, the last one for me. When you're looking at targeting positive EBITDA for the year, for 2015, are we talking about full-year positive EBITDA or perhaps back end, more on the backend side than in the first half? Can you just walk us through that please?

Yes, sure. We're looking at that on a quarterly basis towards the second half of 2015. As I said in my remarks, as we bring in higher margin turnkey projects in the US and Europe, bring those through backlog, you'd expect to see margin expansion and growing revenues during the year, which will drive us to EBITDA positive on a quarterly basis.

So is this a 20% gross margin business or looking out perhaps after 2015, any kind of guidance of what that could potentially -- the potential business side there is?

Sure. Beyond 2015, we certainly see this as a plus 20% margin business that obviously includes the turnkey projects I described in the US and Europe as well as continued margin improvement in the service business, and you also see a pickup in royalties in Asia as well. You know, again, in 2015, we are targeting margins in the low to mid teens, and if you do the math around $50 million to $60 million of average quarterly revenue, you can take a path to EBITDA positive. But certainly, beyond 2015, higher margin potential for the business.

Got it. Thank you so much.

Sven Eenmaa, Stifel Nicolaus.

Hi. Thanks for taking my question. First, I wanted to ask in terms of megawatts recognized in the current quarter, how much of that -- like how many megawatts did you recognize on a percentage of completion basis on turnkey plants? And how do you see that trending in the next couple of quarters?

This is Mike. So in the quarter, shipments totaled about 18.8 megawatts. The majority of those shipments were related to kits and modules to POSCO Energy and that revenue gets recognized upon shipment. Also coming through revenue recognition in the quarter was revenue on a percentage of completion basis related to projects which we announce during 2015, so the UI projects announced earlier in the year and we've talked about University of Bridgeport as well. Those projects are coming through revenue on a percentage of completion basis.

Got it. And you guys had a nice improvement in service margins in the current quarter. How should we think about the service margin trajectory in 2015?

So, we expect continued improvement in service margins. As I described, you'll see the growing fleet contribute. You'll also see growing royalty revenue in Asia contribute. And as we exit some of our early legacy units, that margin, which is relatively low margin, goes away. So continued margin improvement from the service business in 2015.

And the third question I have is in terms of the LIPA projects, I know you mentioned you can't exactly comment on the time when it will be announced, but is your EBITDA guidance contingent upon winning those projects? And by which time this needs to be announced so you be able to recognize revenues from them in the current fiscal year?

This is Chip. Let me just comment on that. So, yes, while I think the story there is interesting that we got to this final phase, which I kind of -- if you kind of listened to what I've said, I picked out the word affordability and competitiveness several times. I think it supports that statement. And because we have nondisclosure agreements in place with this and it's a public bid, we can't comment on that.

But I think the short answer is that we are not fully dependent on that for revenue in 2015 because we've got a lot of other things we're working on as well. And not all of that business would be, frankly, required in 2015, but if we were to get those projects, to Mike's point earlier, we could actually recognize some of that revenue on those projects because of the way we do them and the fact that they are turnkey. So, I think we have some flexibility in what Mike has reported as our $50 million to $60 million average quarterly revenue targets.

Great. The last question for me is, in terms of the working capital side, is it fair to assume that you will be operating cash flow positive in the next quarter?

We haven't commented on quarterly cash flow guidance other than to say we are targeting EBITDA positive towards the end of 2015. You can certainly see a good trend in reducing negative EBITDA, reported $3.7 million of negative EBITDA this quarter, a significant improvement over where we were this time last year.

All right. But you will be reducing your Accounts Receivable in the current quarter, right? (multiple speakers)

Sure, yes. I talked in my remarks about Accounts Receivable going up about $10 million in the fourth quarter. We expect that cash to be collected in the first quarter of 2015. And then we've also talked about the NRG facility as we start to execute on some of the projects that Chip talked about. That's a source of cash to offset some of our inventory as well.

Perfect. Thanks so much. Have a great holidays.

Jeff Osborne, Cowen & Co.

Good morning guys. Most of my questions have been answered, but just a couple. I wanted to follow on Sven's questions about the LIPA contract to better understand if you -- to my understanding, you're bidding on multiple projects. If you are using a partner versus going straight turnkey EPC, would you be able to recognize percent completion in both situations, or if you are using a partner, would there be some kind of further lag?

This is Chip. I'll let Mike chime in as well, but when we say using partners, our model is to do turnkey projects. So in all cases today, we would do the -- we would get that EPC revenue.

Okay. I thought a few of the bids had a third-party developer that you were affiliated with that they were specing in your equipment, given that some of the (multiple speakers)

In some cases some of the actual construction is not done by us. We have somebody else, perhaps local contractors, do that. But it would be controlled by us.

Okay. And then on the $1.5 billion in pipeline that you talked about, I think last year you had talked about a megawatt number of 600 megawatts. I didn't know. Is the $1.5 billion, is that a product and service backlog and can you give us a sense of has the megawatt pipeline grown over the past 12 months, or how does that stand?

First of all, it is a sales and service pipeline number, because that's how we kind of look at our backlog and look at our revenue. So we just try to do that on an equal basis. But the total activity level, particularly in North America, is significantly up over prior year, as we said we would do. It's both in terms of number of projects, Jeff, as well as the size of each project. Those two trends continue to be both favorable. So --

Good to hear. I may have missed that I think in response to a prior question you talked about 18.8 megawatts of shipments. Could you just give the exact amounts at POSCO given you have a specific number over multi years that you have to ship to them, we just kind of track how much is left on that long-term contract that you have?

Yes, sure. So ships to POSCO in the quarter were 9.8 megawatts, and then we also shipped 8.4 megawatts of modules. We shipped six modules to them in the quarter.

Okay. And then I've asked about this I think on the past couple of calls, but can you give us a sense of cash burn expectations for the year? But then more importantly, if you were to win something with LIPA or any other utility, how have the conversations gone about requirements for restricted cash? I think for Bridgeport it was roughly $1 million per megawatt that you wanted. Obviously, if you're bidding on a bunch of 19.6s, there could be a bunch of cash that gets tied up pretty quickly there.

Sure. So restricted cash balance subsequent to the first quarter when we did restrict that cash to Dominion has stayed relatively flat. So as our execution continues to grow on these larger projects, we do expect some restricted cash requirements, but it will not be a significant driver of cash use. Again, as far as quarterly cash use, strong balance sheet, and again, we expect to continue to drive down the operating cash use throughout the year and are targeting EBITDA positive towards the end of 2015.

I guess I'm confused. When you say significant, I mean if you were to win one or two project at LIPA, you wouldn't expect that you would need to put aside $20 million or $25 million to that?

Would not expect to have that level of secured cash for those types of projects, no.

Just to add to Mike's comment here, when we did that Dominion deal, there was -- it was a big project of course, and these other ones would be a similar size in dollar value. But we didn't have some of the things in place that we have today. So there was a requirement, or a higher requirement, to put at restricted cash at that time. We didn't have the second source supply for example in place and all this other stuff.

So our business continues to develop. So are feeling is with the increased operating history and all these other things we have done with the balance sheet that we won't be in a position to lock up that kind of cash in the future on these projects.

That's great to hear. Appreciate the detail there. Thank you.

[Jean-Marc Bonnes, Maribaud] Securities.

Hi guys. I've just got a few questions about the new product and innovations. Maybe if we just start with the energy recovery generator. Is that sort of a waste heat energy organic ranking cycle basis device that attaches onto your multi-carbonate Direct FuelCell?

It is. Let me just explain the process a bit. So when you're distributing -- or you're transporting natural gas, you transport that at a fairly high pressure, and then you bring it down to distribution levels. And typically there's a valve that takes it from a high pressure to a low pressure. And obviously to do that you have to inject heat that today comes from boilers. Just the expansion of it.

What we have kind of teed into here is that basically we run the fuel cell on natural gas and we take the heat that naturally comes off the fuel cell and we use that as the source to keep that expansion process warm. And yes, in effect you have an expansion turbine on the receiving part of that as well that basically generates power you could argue for free other than the amortized cost or the capital cost of the equipment itself.

Yes, that brings me on to the next question. So how much does that affect the LCOE by adding this on?

It is a different value proposition because in everything -- it depends on the gas flow. In my comments, I talked about 62% electrical efficiency on average, but depending on how much you get out of the turbine itself, it could be up to 70%. So I would say --

To clarify, that's 65% for the turbine, not for the whole system.

No, for the system.

For the whole system? Okay.

Yes, because don't forget you've got a fuel cell producing power and X efficiency and you effectively have free recovery of electricity, output power from the turbine, the expansion turbine. So when you put them together you get a number. So the more flow you put past that -- through that turbine, you get a higher output and a higher output then raises the efficiency level. So the LCOE should be compelling when you look at those kind of efficiency levels with really the incremental capital cost being not that high.

Okay. Very interesting. And then on the high-efficiency fuel cell, is that just an improved version of your molten carbonate fuel cell, or is there a different fuel cell technology that -- or in addition to your molten carbonate fuel cell? Or is it entirely clear?

No, it's the same components and everything. It's just a different application. The modules and things are the same. The cells are the same. This is something we had in mind for quite some time because there's a lot of customers out there that perhaps don't have a need for heat utility applications that don't have heat or data centers that don't have heat. But frankly when you raise the electrical efficiency from roughly 47% without heat to 60%, which is a 27% increase in efficiency, places have high fuel cell cost. If you look at this purely as a financial investment, or to your point LCOE kind of a thing, it has a dramatic increase, or improvement. So it was the right time for us to make this new application available to the marketplace that, frankly, increases our competitiveness, as I said before, and affordability. It lowers the LCOE fairly significantly when you don't have a use for heat. Now, if you have a use for heat, using the current product is fine. So, we basically just have a different platform with the same components.

Can I just clarify? That increase in efficiency, that's by tuning the molten carbonate fuel cell, or is that by taking the heat that's generated and putting it through a separate process to generate more electricity?

We are adding another module to the process, which effectively recovers some of the heat in a simple (multiple speakers)

So it's a waste heat sort of recovery module?

Yes.

Okay.

But it's a fuel cell as compared to an organic ranking cycle or an expansion turbine or something like that. Yes.

Okay, great. And then my last question is on the tri-generation product. Obviously, there is a lot of talk in the markets about the release of fuel cell vehicles. One of the things that they need is obviously very high purity hydrogen in general. So I was just wondering what the purity of the hydrogen is that you guys generate. And also, what do you expect your cost per kilogram to be?

So on the purity level, as I mentioned in my comments, we already have a plant operating delivering the purity level that is required for the vehicles. So, the purity level that we get directly out of the fuel cell is perfectly fine for vehicles.

So really the question becomes is there enough vehicles out there that need fuel, and can you provide both affordable and renewable fuel, which is the Holy Grail of the whole process here, right? And really what it comes down to is you really need to have a certain size production facility or fuel cell so that you could hit on the affordability aspect of that. And then you look at the business model. And we've come up with a business model and an LCOE on this that is attractive for renewable or frankly even nonrenewable fuel. Because you can reform natural gas today to make hydrogen. The problem with that is the emissions profile. So as long as we can make things in a 3 megawatt size plant, which gets you down to roughly in terms of dollars or euros, but depending on the rest of the business model, can get you anywhere from $4 to $6 per kilogram of fuel that you then need to bring out to a transport station or a dispensing station, the math works. So it's a little bit longer conversation for the phone call, but we have had discussions with different folks, including the car companies, and they are very interested in this. And it just becomes a chicken and egg. You need to build the plant to the certain size to get the costs, well then you've got to have the demand to absorb the production. So we are working on ways to mitigate that process so we can get this implemented.

Cool. Okay. Thanks. I wish you luck with that and have a great Christmas and new year.

Hope I didn't scare you with the statistics but it is (multiple speakers)

At this time, I would like to hand the conference back over to Mr. Chip Bottone, Chief Executive Officer, for closing remarks.

Thank you everybody that joined the call today. It was a little longer than normal, but that's good perhaps. And I appreciate everybody's questions and I think it's centered around a few things, generally about, wow, the affordability or the competitiveness is improving, which is great. Obviously the margins.

But I would guess I would just kind of summarize things in a few ways and say the execution on strategic initiatives has improved our solutions competitiveness, as I said. And I think that's verified by things like interest in LIPA, and I can just tell you other customers around the world. We continue to expand the margin. We've got some more work to do. As Mike said, we have a clear path on how to do that. But I mean at the end of the day, it's about improving our margins to get to profitability as a company while we grow the revenue as well.

And then finally I guess we want to make sure that we position the Company for the future growth in a prudent approach where we manage capacity. We've got this plan out there that doesn't tie up a lot of our cash and I think other people believe in our story and they've supported us with support in different ways to help us make that happen. So I would just like to end then and say I'd like to thank everybody for all of their questions today and through the calls this year. And thank you for your continued support and wish you all a very, very nice holiday season, and we will talk to you after the completion of the first quarter in 2015. Take care.

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