普拉格能源 (PLUG) 2002 Q4 法說會逐字稿

Good morning my name is Judy, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Plug Power fourth quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on telephone keypad. If you would like to withdraw your question, press star, then the number two on your telephone keypad. Thank you. I will now turn the call over to Miss. Cynthia Mahoney, Manager of Public Relations and Marketing. Miss. Mahoney, you may begin your conference.

Good morning and welcome to Plug Power's fourth quarter 2002 financial review. Participants on the call, include Roger Saillant, President and Chief Executive Officer; David A. Neumann, Chief Financial Officer; Gregory Silvestri Chief Operating Officer; Mark Sperry, Chief Marketing Officer and Ana-Galliano, General Counsel. Today, Roger Saillant will begin with an update on our activities throughout the fourth quarter ended December 31st 2002, followed by Dave Neumann giving review of our financial results. We will conclude the call with a question and answer session. To begin the call, I would like to first read the Safe Harbor statement. During the course of this conference call, our management may make projections or other forward-looking statements regarding future event and future financial performance of the company.

We wish to caution you that such statements are just predictions and actual events or results may defer materially. These are forward-looking statements within the meaning of the Safe Harbor provisions of the US Private Securities Litigations Reform Act of 1995. We also refer you to the press release, I mentioned at the onset of this call and to other documents that the company files from time-to-time with the Securities and Exchange Commission, specifically in the company's annual report on form 10-K for the fiscal year ended December 31st 2001, dated March 29, 2002, and filed with the Securities and Exchange Commission on March 29, 2002. These documents contain and identify various risk factors that could cause our actual results to defer materially from those contained in our projections or forward-looking statements. We undertake no obligation to revise or update any such projections or statements or to reflect the occurrence of unanticipated events. Now, I'd like to introduce Roger Saillant, President and Chief Executive Officers of Plug Power.

Thank you Cynthia. Good morning. Thank you for taking the time to be with us today. As our reflecting last year, I am pleased with the progress we continue to make in spite of a slow economy and the threat of war. As a country, we are redefining our energy practices to achieve energy independence and security. As a company, we are committed to developing a product that would change the energy landscape forever. Through hard work and dedication, our engineering team continued to improve and refine our product. This past year, we enhanced the Genesis(ph) product by adding standby and combined heat power capability. Our system now captures the heat generated during the production of electricity and makes it available for integrations into the home, heating systems and these are also available for portable hot water.

This system is capable of generating 5 kW of electricity and 9 kW of heat. This past fall, we announced that our system is now capable of providing power to critical loads on grid interruption. Now, during a grid outage, this system will automatically transfer to standby mode providing uninterrupted power to critical load. Upon restoration of grid service, the system will resume its normal grid parallel operating mode. Our manufacturing, engineering, and supply teams continue to identify new ways to decrease the cost of our system. During 2002, we decreased the direct material costs of our Genesis system by approximately 32% on top of a 37% reduction in 2001. Significant reductions were made across all sub-systems, the Reformer, the Stack, and the Power Electronics. We are grateful that we have a strong supply base on which we can rely upon to help us identify component subsistence (design cost reductions while improving quality. By managing our assets wisely and progressively engaging in the marketplace. We are pursuing the quickest path to profitability. Last year, we've reduced net cash expenditures to approximately $37m below our initial guidance of $40m to $45m. In the fall, we announced that we entered in to a definitive merger agreement with H Power Corporation. Once we obtain shareholder approval, we plan to acquire H Power in a stock-for-stock exchange valued at approximately $50.7m. We expect that we will have approximately $90m in cash at the closing date, which should be sufficient, after integration costs, to fund operations into 2005.

We continue to realize that we cannot be successful alone. We're constantly looking to secure our strategic partners that help us mature as a company and develop a product that's commercially viable. This past year, we announced an exclusive joint development agreement with Honda R&D Company of Japan. We plan to develop and test jointly, an initial prototype home refueling system for fuel cell automobile. Government partners are also critical to our success.

A few weeks ago, President Bush underscored his commitment to help build the hydrogen economy. At the same time, we were asked to participate in an exhibit from Washington DC that enabled us to showcase our technology. These opportunities helped raise awareness of the need for additional funding for continued research and development. Plug Power works to help shape federal and state government policies and regulations by building support with political leaders and regulatory agencies in Washington DC and in states throughout the country.

One way to build support is to continue to explore new avenues for system deployment. Last year, we delivered 121 systems, developing a fleet that generated approximately 1.6m kW hours of electricity in the field. These systems were installed and have operated in more than 30 customer locations including 19 US states, Japan, and Germany. These installations are generating electricity for research facilities, commercial buildings, multi-family homes, military bases, utility substations, residences, national laboratories, universities, and state parks, and in fire stations.

In addition to the above, we continue to operate the world's largest single fleet of proton exchange membrane fuel cell system at the Long Island Power Authority, while also broadening installations within their service territory. We continue to work with GE, DTE , US Army and Navy, to position systems in the field fields in a variety of locations. All this experience has allowed us to work effectively with multiple entities, enabling us to understand interconnection issues and reduced system installation time. We are benefiting on a daily basis from the feedback we are getting from these installations.

As we begin a new year full of promise, we plan to continue our focus on cash use with net cash expenditures of $35m to $40m excluding the one-time expenses associated with the H Power acquisition. Complete delivery and installation with our partner [Inaudible] our fuel cell heating appliances under the European Union virtual Power Plant Project. The filler obligations under our joint development agreement with Honda, the development demonstrated a home refueling system prototype. We have instilled demonstration of our prototype LPG system and secure additional strategic partners.

I'm looking forward to another productive and energizing year here at Plug. As a company, we continue to be challenged and enthused by the business of developing our product that will change the landscape of how we produce our energy. I'm grateful to our partners, customers, employee, and shareholders. We are headed in the right direction and together we will be successful. Now I will turn the focus to our fourth quarter financial performance and hand the call over to Dave Neumann, our Chief Financial Officer. Dave?

Thank you Roger. I will now provide a summary of the fourth quarter and year ended December 31, 2002 financial results beginning on our statement of operations. Total revenue consisting of product and service revenue as well as contracts revenue was $3.4m in the fourth quarter ending December 31, 2002, compared to $2.5m in the fourth quarter of 2001. Year-to-date total revenue has increased to $11.8m in 2002 from a $5.7m last year. During the quarter, we recognized product and service revenue in the amount of $2m, which compares to $2.1m last year. Full year product and service revenue increased to $9.4m in 2002, compared to $2.6m for the full year of 2001. We continued to defer 100% of our product and service revenue to time of sale and recognize this revenue with the period of the underlying service and other contractual obligations.

The impact of this accounting on our statement of operations is conservative, since the cost associated with the production of these systems are fully expensed as they are heard. Contract revenue under research and development contracts was $1.3m for the quarter ended December 31, 2002 compared to $369,000 in the fourth quarter of 2001. Year-to-date contract revenue was $2.4m in 2002 compared to $3.2m in 2001. Cost of revenues was $3.6m during the fourth quarter of 2002. This compares to $4.7m during the fourth quarter of 2001. Our cost of revenues represent our direct material costs, the fuel cell systems delivered during the quarter, combined with the labor and materials associated with servicing all of the systems under contract.

These costs consist primarily of productive materials and fees paid to outside suppliers for subcontracted components and services. It does not include any factory labor or overhead expenses. Cost of revenues also include the fully burdened cost of research and development contract activity. Full year cost of revenues was $11.3m for both the year-to-date periods ending December 31, 2002 and December 31, 2001. Research and Development costs were 10.4m during the quarter ended December 31, 2002, compared to 13.5m in the same quarter last year. Year-to-date research and development costs were $40.3m in 2002, compared to $60.6m in 2001.

We continue to keep our development cost down by using modeling and simulation tools to architect a modular fuel cell system, the benefit of using these modeling and simulation tools has been to reduce spending on hardware for internal testing and evaluation. We are also moving to an extended enterprise model, whereby our suppliers play a larger role in helping us to design and build important parts of our system. This has enabled us to reduce research and development costs without cutting back on product developments.

Finally, in collaboration with our customers, we are leveraging the learning we get from our field person to make improvements and modifications to our fuel cell system. Recurring general and administrative expenses were $1.9m in both the quarter ended December 31, '02 and the quarter ended December 31, 2001. Year-to-date general and administrative expenses has been $7m in 2002, compared to $7.5m in the same year-to-date period in 2001.

Interest income was $221,000 for the quarter, compared to $928,000 in the fourth quarter of 2001. And year-to-date interest income was $1.7m, compared to $4.1m last year. Equity and losses of affiliates, represents our minority interest in GE Fuel Cell Systems and Advanced Energy Incorporated, both of which are accounted for with the equity method of accounting. For the quarter ended December 31, 2002 we reported a loss of $165,000 including $448,000 of amortization on our original investment in GE Fuel Cell System.

Our investment in Advanced Energy was fully expensed as of the March 31, quarter of 2002. Our net loss for the fourth quarter was $12.7m or $0.25 per share, which compares to a net loss of $17.1m or $0.34 per share in the fourth quarter of 2001. Year-to-date, our losses have been $47.2m or $0.93 per share, compared to $73.1m or $0.56 per share in the same period of 2001.

Net cash spending has decreased to $10.5m during the fourth quarter compared to $11.7m during the fourth quarter of 2001 including $815,000 that in the fourth quarter of 2002 related to our definitive merger agreement with H Power Corp. under which we expect to acquire H Power in a stock exchange valued at approximately $50.7m. Year-to-date, our net cash spending was $37.1m in 2002, including about $815,000 mentioned above, which compares to $55.5m in 2001. Weighted average shares outstanding for the fourth quarter were $50.9m in 2002, compared to $50.2m in 2001. Our balance sheet includes $55.8m of unrestricted cash and marketable securities as of December 31st 2002. That concludes our prepared remarks and we would now like to open up the meeting for questions. Operator will you please proceed.

At this time, I would like to remind everyone if you would like to ask a question please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from David Smith of Salomon Smith Barney.

Good morning guys.

Good morning.

Good morning Dave.

Hi. I guess the obvious first question is, any update as far as the H Power deal beyond what you've said so far in terms of timing?

The timing there is it that we're in the process of mailing the shareholders and collecting vote. The proxies went out last week and the meeting date is scheduled for March 25th at which time we'll close the transaction.

Okay. So, by end of the quarter, we're looking [Inaudible] ?

We will expect it by the end of the quarter. Sure.

Okay. On deferred revenue, you talked about $6.1m on the balance sheet. What's the amortization period of that deferred revenue?

The amortization ranges depending on the period of the contractual obligations but they generally range from 12 months to 18 months.

Okay.

We defer a 100% upfront and we're amortizing that over 12 months to 18 months depending on the contract.

Okay. So, the average period we should expect is about a year to year and a half?

Yes.

Okay. Any update as far as the timing of the backup product goes for 2003?

Dated March 30, we're still tracking to a next generation of that product, so I think you're familiar with we put the first version of that in the field late last year. We continue to have some installations around that and we're taking that learning and driving that back end to our next generation product, which we expect would be towards the latter half of this year, early part of the next year.

And then, as far as deliveries go this year with that product and others?

In terms of number of deliveries David?

Yeah. Are you giving any forecast as far as that goes?

Yeah. I would say that we would expect to at least do the similar numbers of what we've done in the last two years here. There's a fair amount of uncertainty at the back end around the exact product-delivering uptake on some of those. So, there's up sight to that. I would say at least what we've done in the last couple of years.

Okay. One thing on cost, you cut those 32% this year, 37% last year. Any targets that you are setting for this year, as far as where we can expect to see costs come down and then secondly on cost, where is it today versus where as a multiple, say for instance as to where it has to get?

David, we don't have a specific public milestone this year for the unit cost on the first product [Inaudible]. That's mainly because most of our engineering resources and the vast majority of our supply-based resources are targeting the future generation products that are currently under development. So, we're growing to continue to manage the cost of that product if those units are sold this year. But we don't have the milestone for another similar reduction that we've had in the last two years.

In terms of the next group of product, you are probably looking at expectations to drop down at least 50% from where these products where the prior generation is and that is to get us started on a new earning curve. If you look at where our costs have to go, both Plug Power's engineering groups, as well as the supply base understand that we need to start these new design at a number that's approximately half or better from where the prior designs left off and those are all, we believe achievable given the work that we've done so far that the work that we will do it likely.

Okay. One thing on, strategic partners, you've talked about Toshiba, are you guys seeing any more interests following the State of the Union comments just around companies in blue-chip industrial land or Hi-Tech companies that at this point say they have to get the ring or they had in the rings as far as fuel sell products go for down the road?

[Inaudible] I would say yes. Now, across the Board the interest is that we picked up in terms of the number of phone calls we get inbound whether it's just about general information about Plug Power or sourcing units or potential strategic partnership type activity, so, clearly since the State of the Union address, the amount of interest in the area in particular has gone up. And I would say, on follow up here, the questions around Toshiba, we do have ongoing conversations with other potential partners in terms of distribution of the premium power product. That's it.

Okay. Just one final housekeeping question, the $800,000 roughly of H Power cost. Is that shown in G&A?

Yeah. That is in G&A.

Okay. Thanks guys.

Thank you.

Your next question comes from Jarett Carson of RBC Capital Markets.

Hi, good morning. Roger, ] an inside edge power for a while. I know that at the time of the agreement, you said that we are in the preliminary stages. You want to take a look here. What have you seen inside that you like and that you think, you would like to keep and continued to advance. Can you talk about that little bit?

Andrew, turn that over to Ana-Maria Galliano.

Hi Jarrett, we because of the merger having closed gap, we have been unable to assess the technology. We are assuming that we haven't been able to accept the technology to the point where we are ready to make a decision about what we will continue and what we won't. We will do that post shareholder approval assuming shareholder approval on March 25th.

Okay. Fair enough. Next question. This website that highlights your systems running within the DOD, particularly the Waterville(ph) Arsenal and when I look through that there is quite a few, probably about 10 systems, which gives me a decent idea of where may be that or at least a snapshot of where the technology is and I am a bit concern about the fact that the systems, the efficiency starting in the high 20% range and over a - kind of a brief 12-month period has degraded down into roughly the low 20% range. Can you talk to me about what you are seeing behind that? What the issues are and what you are doing about that?

Sure, I think first one, I will make a comment to that and then have Greg Silvestri (amplify. The first thing I want to do is to emphasize that putting these systems out is to demonstrate, first of all that they can operate as systems, which is a major challenge in terms of having the various subsystems talk to each other and effectively deliver power and heat depending on the design intent. The second is we feel that we need to figure out how to enhance the operation in terms of reliability and also designs that we have -- we design out the cost and improve the reliability. The optimization that's required for system efficiency improvement is the next phase of development for us and in fact we have significant improvements identified inefficiency and I don't know Greg you want to add that?

Yes, I'd just say that what you see in those numbers, most of that degradation that you feel over that period of time is the result of the drop in efficiency that is carried to the stack. Perhaps that's an issue that we aware of an issue that the industry is aware of and that out there developing membranes that we are aware of. So that is a long-term technology matter that Plug and [Inaudible] for our researching systems architecture group, we've got a membrane developing.

Also you have to keep in mind that there is a specific set up of test objectives that we are pursuing in a wide range of operating of those systems takes place at the Waterville Arsenal. So how we choose to test those systems. Some of the objectives we have were certain applications that they are going to be used for also affecting efficiency of both [Inaudible] and Novak going in. Both systems are not tuned to maintain the best possible efficiency convert over the course of their deployment.

I think that much likely we have had conversion for the past about the liability or cost. We are pleased to be out there in the public eye with our actual numbers. Lot of times when we see representations made by companies of efficiency numbers, those are representations for beginning of life that might be representations for a single operating point. They are unnecessarily indicative. We don't believe, we are necessarily for the companies don't represent them as cumulative across all operating points over a long period of time to go. Feedback we've received from our partners was that programs feedback we received from the people had supported them pretty well are that those numbers are very significant positive accomplishments.

Yeah. I think, the other part to add to that is the availability numbers which are on the same website. In fact, we are showing it to availability numbers greater than 94% and when they designed that program, they felt, the army core of engineers felt that there was no company that could have availability greater than -- that anyone could achieve 90% availability. So in terms of the way you are looking at it in terms of focusing on the efficiency and the way we are looking at it from a holistic point of view. I think it's a significant milestone in the progress we are making towards fully designed and a good value proposition for our customers.

Okay. Can you give me an update on where we are with, with by launch, and may be a little bit more color about, what you see over the next, over kind of 2003 and may be in the '04?

Sure, Jarett this is Mark Sperry, with respect to [Inaudible] we have towards the end of last year, made our initial shipments, two of them that were installed in support of the European Union, our virtual power plant program. So, our guidance for this year, as you referenced that we will in 2003, fulfill our obligation in terms of unit shipments that particular program. Just to remind you that program in one where our units will be distributed actually across several countries in Europe and they will be centrally monitored and have the ability to be remotely dispatched and brought up and down based on the power consumption needs of overall grid.

So, in terms of 2003, our major focus will be on that program continuing to pull units across the continent in Europe, and in new countries and gain the learning of interconnection, as you know there is much different regulatory environment in the countries in Europe, so we will learn quite bit about the installation, some of the laws there around net metering that are different and not available here in North America, for example. So, that will be our primary focus, we continue to, as all our products drive enhanced features into the, so the versions of the product that we will be shipping next year, will be enhanced versions of versus the one that went late last year. And we will continue as I said to deploy against that particular program. There are also under contact currently other customers outside of the European Union, for which Ballard (ph) has placed orders.

Okay. One final question Greg may be, I mean Mark, may be you can give little more color on the intermittent or back power. How do you see that market, may be right now or 12 months from now, I mean certainly it's the challenging environment and a number of [Inaudible] players are focused on that, as that is one of the earlier high price point markets, what you, what is your feeling currently?

Our view is, we talk a lot internally about an adoption curve as well as externally. We do see that clearly as an earlier adopter market from a, both from a technology capability as well as a price point perspective. So the existing technology there that you are going up against in the form of either lead acid batteries or lead acid batteries in combination with genecets(ph) is one that allows itself to that is, opens itself up to fuel cell technology as a good alternative. We are seeing, as indicated in my answer to David a little bit ago, that a definite increase in amount of interest in that product space. And we expect as I said earlier, that we will have a next generation of that particular product which we expect will be, able to be put into market at a commercially viable price point, very quickly.

And may be I can just follow up on that. I mean how are you looking at the kind of cracking the fuel storage knot if you will or fuel, you are looking at compressed hydrogen, metal hydrides, natural gas reforming, what looks to be the, I just had a broad view, what looks to be the, or readily adaptable, solution currently?

I think if you look at it, we see it progressing but essentially there are some available storage technologies that exit today. There is lot of work being done on advanced technology, be the hydrides or advanced composite storage of cylinders. So we see that, really starting with the technology that exists today, there is an infrastructure that can service this direct hydrogen and the refueling of that once it has been depleted, but in longer term we see that, some of the newer technologies are being deployed and ultimately moving in a direction, where you can get into a self contained regenerative type system if you will. But we see that market really starting with the technologies that exist today.

Okay, do you think that kind of your initial roll outs are focused would be based on compressed hydrogen cylinders that an industrial gas company might be the one you are servicing?

That's correct.

Okay, thank you.

The next question comes from David Snow of Energy Equities.

Yes, I wondered if I was putting it together correctly. You have indicated that you were targeting your next group of products at least 50% less cost than where your last generation or your current generation is? And you also said you needed 50% or better cost cuts versus prior designs to reach your commercial targets. Does that mean that your next generation is going to get you to the point that you will want to be at in that cost?

No. I think what Greg said is, we have to be at a launch point at least 50% improved and on a different learning curve that we are currently on and that just means that we take a look at it from an isobar perspective cost drop over time. The new design allows us to get much lower in cost and the collaborations that we've established and the processes we've established internally around product design and development will enable us to come -- to approach what we think is a good value proposition for the market in a relatively short period of time.

Because you were first talking about direct manufacturing cost and it's 50% and I think it's the total system cost that you have to get into the marketplace. Is that why that's -- ?

Direct material costs, we were saying. It's a total -- when we look at the total cost proposition, we focus on direct material costs now because that's the proxy for the entire cost of the system and in fact, this is the most heavily weighted cost contributor. When we move further down in the cost and direct material cost, our manufacturing time, test time, engineering time itself would all become more and more significant. And, we are already working hard at bringing those costs down in parallel with the direct material costs.

So, the next group will not get you to where you are trying to go, but it will give you the data points to move in that direction or -- I am still trying to figure out what you meant when you said the next group will get you to where you are trying to go?

Well, what we dream is that we'll launch initially in a much lower cost, total cost regime) and from that we will follow the learning curve down on that product away, whether it's the LPG product, the natural gas product, or backup product, home refueling product, and so forth. Whatever it happens to be, that product array will be capable based on a learning curve of coming down to a point where, in fact, we have gross margin and our product has the value proposition for our customer.

All right. Now, the next generation is going to go late in this year or early next year. I think is that -- ?

Yeah, David. This March, but I think part of the confusion here is, it really depends on what product you are talking about?

Okay.

Yes, the product of the next generation of what we refer to is GenCore, which is our premium power product. Now, that being late next year or the early part of [Inaudible] late this year -- the early part of the next year. We'll have a price point that we believe is commercially viable. So, we will be -- in answer to your question inline with where we believe we need to begin to penetrate their market.

Okay. That's not to say the whole product is up for the commercial -- residential market that would be up the next generation -- [Inaudible] go out a year later for that?

Well, we haven't really given a guidance as to when that would be expected at this point.

Just one more question. Do you expect this GenCore premium power product to give you instantaneous operator free, computer power backup or just an industrial factory type or office backup -- what and how will you achieve the seamless power if that's what you're going to do?

Our goal is absolutely seamless power. That's what is required inside the industry and we need a very nominal amount of [Inaudible] be a some sort of electrical energy storage device.

Better?

We really haven't made that decision at this point, but, I mean, leading candidates would be better.

Okay. Thank you very much.

Thank you.

Your next question comes from Chris Kwan of TD Securities.

Hi, Chris.

Hi, gentlemen. A few questions. First on the deliveries. You talked about 29 [Inaudible] systems were in the fourth quarter now, I think, sometime last year, you delivered 150 KW systems to State of California?

That's Correct.

What's the status on that? Have you delivered any more of those or is that a one-off?

It was actually, I'm sorry delivered to Las Vegas not California. But that should be viewed as a one-off prototype system that was designed for learning. It was a program in conjunction with the Air products and the Department of Energy to be part of a fuelling, hydrogen fuelling station demonstration. So, there is, on that site, a hydrogen reformer generating hydrogen that's feeding our 50kW system that's providing electricity to parts of the site, as well as the ability from that reformer to store the hydrogen and eventually refuel vehicles be they buses or automobile.

I'm just curious on what the announcement on, for the transportation purposes, Is there any more interest to do other types of installations like that? Like this one in Las Vegas?

Yeah. There is interest, and I understand that the Department of Energy is working on some solicitations that will be out within the next couple of months around hydrogen generation in particular. In addition to that the part of the programs that are being kicked around be they the one from Bush in the White House or some of the ones in the Senate right now. All include hydrogen generation for generically as well as specific for automobile or fleet refueling as something that they are looking for input against.

Okay. And second question, I think Roger you mentioned on the cash usage $35m-$40m. Did I hear that correct. Is that what you expect for 2003 or that was your original guidance for 02?

No. The original guidance for 02 was $40m to $45m. We came in at around $37m. And our internal objectives are to stay below $35m to $40m for 03.

That includes assuming the H-Power acquisition?

Actually the $30m to $45m is an ongoing operation. So, it excludes the one-time costs associated with that integration.

But it assumes that there are operations within that?

That's correct. So, the ongoing operations would be included. But the one-time costs associated with the integration is not.

I would like to correct one answer I gave to David Smith a little earlier too. The $815,000 that we spent in the fourth quarter is on the balance sheet right now pending the closing of the transaction. I think I said it was in D&A, but it is on the balance sheet for the prepaid expense.

Last question on employment levels. What's your current employment levels and what you expect to be for the end of the year?

We've going to hold pretty tight somewhere below 350 people.

For today and for the end of the year?

Yes.

Okay great. Thanks a lot.

The next question comes from Tony Liner ph) with the Linton Group (ph).

Hi, How are you. Couple of questions. Firstly you mentioned before that as far as the H Power acquisition you are using a value of I think $50.7m. Is that right?

Yeah. The original value was based on $50.7m.

Okay, so that is the original value. If I remember the last filing we made when we set the dates of our shareholder meeting and their shareholder meeting. I think, because I know it is based on a complicated net cash value.

Right. That $50.7m assumed $36m in a concept called net cash.

Right. Okay, so that is not up-to-date because in the last filing said, I think, $34m at cash.

That's right.

So I can infer that the transaction value is $2mless now. Can you give me another update on that, if you have one available?

That is almost current information. The $34m is the midpoint of where those estimates are coming out.

Right, how is it possible for me, you know, before I work to determine the latest numbers on that?

We are pretty comfortable that the disclosure we made in the proxy statement is accurate.

Okay. Only reason I say it is because it was $2m less than the previous one. Would you think we assumed $36m?

Yeah.

Okay, also can you discuss for a second just the GE Fuel, GE relationship? Any updates as far as that?

Tony, Mark Sperry here. There really aren't any updates for that, the relationship continues as it has been.

Okay and that is what I want to hear, you know, I know it is an important part of.

Absolutely.

So, you know, state of the world being what it is, I just, you know, want to make sure where everything is, status quo I guess, for a better word.

Yeah, we meet with them regularly. In fact, we had an extended meeting with them yesterday. When we say regular, it is weekly in some instances and certainly monthly you know formal sense of that. And we interact with GE as a group all the time.

Okay, and everything is still great as far as that relationship.

Yeah.

Okay, excuse me for my voice here, but thank you so much. I appreciate it.

Okay Ton.

Your next question comes from John Quealy (ph) of Adams, Harkness & Hill.

Hi good morning.

Good morning.

Could you comment on your unit shipment expectations for fiscal '03 as compared to fiscal '02?

Yes John, Mark Sperry. As I said earlier, let me just say that our quarter backlog is little over 95 units, 96 units. And as I indicated today really we expect certainly to do with at least what we have done over the last couple of years and that the revision towards the end of the year really is little cloudy depending on the uptake of our next generation products so might we just give you those data points?

Okay. Thanks and then one follow up. What end-market applications would you expect you'll see the largest proportion of shipments in '03? I know we talked about Vallant(ph) earlier but in terms of end markets, what sort of folks will be getting the most this year?

I would say the primary -- primarily would be again our utility partners. So if you looked at our profile of shipments in the applications that Roger talked through earlier. You look at progressive utility partners would probably be the biggest market space followed by a fair number of the customers in the government sectors, military applications, demonstrations a lot more certainly will be a major part of the shipments that go out this year in terms of their siding and support of the European union and multi family dwellings and I would also expect that we will begin the season uptake late in the year around the premium power market.

Great. Thanks very much.

Welcome.

The next question is a follow up from Jarett Carson of RBC Capital market.

Mark. On I guess we had New Jersey natural gas got an order from the PUC to be able to cut deliverability charges on fourth distributed generation in particular rather very similar types of announcement out of Albany last week although I think for the residential units it actually doesn't, they are not ordered to come up with some type of price break until January of 2004. Could you speak to that little more what you are expecting may be out of Albany and are you seeing this certainly encouraging trend. Are you seeing this being replicated in other states?

Yeah, we certainly are seeing a lot of improvement in movement in the regulatory environment. So we did the issuance, I think of the orders on and I believe this is on natural gas side here in Albany to make sure that any provisioner of distribute generation is not unduly disadvantaged in terms of the gas pricing. That was a welcome introduction from the PSC as well as the order that follows on to Pataki's request for renewable portfolio standard. California, as the rule 21 which is absolutely targeted at streamlining the insulation inter-connection process and there's a fair amount of stuff actually have been in the state of Texas as well in support of those types of issues. So, in general there is still a lot of work to be done but I think the momentum is building in the proper direction.

Okay thank you.

Your next question comes from Allen Metrony (ph) of Copper Beach Capital.

Hi. Thank you. I may have misheard you have right now, I think cash if I account all the marketable securities and restricted cash on your books you have about $97m or $98m. Did you say, after the closing what was the number you expect to have in terms of gross cash on your books?

Yeah. As of the closing we expect approximately $90m. I think you're misreading the balance sheet.

Okay.

That you are seeing. We have about $61m in cash on the balance sheet at December 31, 2002.

Okay, I am looking at cash and cash. Oh! Excuse me. You're right, I was looking at 2001, well, I appreciate that. Okay.

Okay.

That's fair, could you give us your revenue guidance for what you expect to do this coming year?

I wouldn't give any specific revenue guidance; I would just point you back to my comments earlier about where we're seeing the activity in terms of the number of units.

Okay what are the key goals that you are focusing on for this coming year?

The goals that we are focusing on really continue to be our focus on cash utilization, so, back to the $35m to $40m in net cash consumption excluding the one-time expenses associated with H Power. The European Union virtual power plant program that we talked about in conjunction with the line, so satisfying your obligations their to put those units in the field. Also our joint development agreement with Honda in fulfilling our obligations to demonstrate a prototype home refueling system this year. The field demonstration of LPG prototype system, as well as the securing of additional strategic partners. So I think they would be the elements that we are keenly focused on in 2003.

Okay, also it's great. I appreciate that. If you have mostly called the $55.8m that you have on your books plus call $35m just round numbers that you are going to get from $34m, you are going to get from each call gives you about $90m. You say for a rate over ($35m to $40m of cash burn this year gives you about 2 years of cash burn assuming it doesn't go down a little bit more, likely it well get into '05. What level of working capital or product introduction, I mean it's sort of a catch 22?

You can either slow down your burn, but then you can't get the revenues out, you can't get the products out and maybe the evaluation isn't correct. But, if you accelerate the burn it may hinder your ability to get out there and compete and eventually build a very successful company. How do you reconcile that and how do you measure the fact that you have bigger competitors coming in and I am just wondering, why do you think it pays it appears to be part of a bigger company as opposed to trying to do it alone with restricted cash, with access to, with restricted environment in terms of trying getting enough cash to fund things. Do you think, you need to partner?

Alan, welcome to the world of CEO and we have a strategic operating group that worries about that, as well as the members of the board. That balance that you are talking about requires 3 or 4 things. One is it requires to be, you need to be very focused on what you do. Look very difficult to shake loose on the track that we are on.

The second is that we need to be in good contact with our supply base and our investing partners, including actually all the individual shareholders out there and investors to understand what their sense of the market is. The third is we have to be very well aligned with the governmental agencies, because we look at them as early adopters and they give us huge insight in terms of statistical databases in order to shape our designs, take our cost out, get our reliability up.

So then, and the fourth thing is we don't take our eye off the ball and worry about large competitors because no matter what happens large competitors have to do the same things that we do. They have to get units out there. They have to get the experience in the field and become involved. Our hands, to give you an idea just how dirty our hands are.

Our units, for example, one arm power authority, we collect 200 data points every 10 minutes and we go through some very complex data analysis with the help of General Electric statisticians as well as computer systems, as well as our own experience in analyzing field data and we understand and interpret some very subtle factors that contribute to what Greg was talking about earlier relative to increasing the life of the membrane, increasing the performance of the system and getting the kind of design underway that will truly deliver a value proposition to the market and create margin.

So, when we do our work in a very focused way knowing that we have to get the cost down and the reliability up, we can't spend a lot of time worrying about what others are doing and what their strategies are, only in the sense of sensing that if they do something really remarkable that can move the industry, we have to be aware of that and we are. We know that in a practical black and blue sense, blue-collar sense they have to do what we're doing at some point. And the fact that we're doing it now, only helps us later to go faster.

Well, I appreciate that answer. I appreciate your, -- that's helpful. One last question if I can, to understand the cash situation $90m at the close does not count for whatever you lose in the first quarter or your burn in the first quarter and does not count any restructuring charges or severance charges or anything like that from the H Power deal, correct?

That's correct.

Do you have any, can you give us a sort of range as to what you think, H Power may cost you in terms of shutting down or resizing it the way you want to?

We are not really able to speak to that, immediately, we certainly will speak to very clearly in the second quarter conference call. But understand, as I said in terms of being very focused on what we have to do. We are very careful about every dollar that we spend and we are very focused on keeping our cost surface area to an absolute minimum. So, I think that people will generally be, pleasantly surprised by how we have conducted ourselves through this acquisition.

Great. Thank you very much.

Once again if you would like to ask a question please press star and the number one on your telephone keypad. The next question comes from Ben Cubit (ph) of MNM Capital.

Yeah, hi there, I just had a, I guess follow up question regarding the H Power cash balance. In the proxy you mentioned $34m. Wondering if that $34m is the cash balance now or that's the one that was expected at the close?

Yes, that is a net cash concept which really is disconnected little bit from the actual cash balances.

Yeah, I know, I saw the very convoluting formula in the proxy.

Yeah.

[Inaudible] you are going to get that. It is kind of ambiguous the way it is worded in the proxy -

Their actual cash balances are actually a little higher than that. They filed a November Q that you can get from information off of.

In order to understand in terms of the calculation you are using to find the final ratio. Is that $34m, what you expect it, when you put proxy out? Is that way to expecting it to be at the close on March 25th?

Yes it is. That's our most current disclosure, and we feel fairly comfortable with that disclosure.

Disclosure that that's it would be on March 25th or that what it is when you put the proxy out?

That's what it will be on March 25th.

And that what the ratio will be based on the close of March 25th?

On that net cash number, correct.

And has PLUG Power confirmed this number so to speak, or is this number, this $34m was just what was put forth by H Power independently?

We have reviewed the net cash calculations with H Power, it has been a collaborative effort.

Okay, and so - and your confident that it will be very close to the $34m then.

Yeah.

Yeah, okay, great, thank you very much.

I think we can take one more question.

Your final question is a follow up from David Snow of Energy Equities.

Yes, did you -- when you said you are going to hold the people tight at 350, will that include H Power?

Absolutely.

And, are you more interested in their technology or their partners or their facilities? What is the order of -- ?

Well, in terms of the order, you've touched on things that we've considered all the way through. We're very careful to look at IP; we are very careful to look at the implications of their facilities; we are very careful to look at their people, their background; we've had extensive reviews of a significant number of H Power employees.

We certainly look at the cash and the cash conservation. To put any one of those in importance over the other at this time would really be a disservice to the whole strategy of the acquisition. We really look at it holistically. I think it will take -- is that okay, David?

Would you give us little more color on that as you get this under your belt?

Yes, we certainly will.

Okay.

And, I think that's one more question that was left. I think it's David Smith.

Yes. Your final question comes from David Smith of Salomon Smith Barney.

Thanks, Roger. Just a quick question. It may take a minute for you to answer, but in terms of cost reductions that you guys have talked about -- I know you haven't given a specific target for 2003, but can you give us some anecdotal answers to where lot of cost reduction can come from in 2003, and maybe also, what you are seeing on the supplier side, if you are seeing more opportunities develop in terms of relationships. Could you talk a little bit about that -- in lowering costs on both your development cost and also eventual component cost?

David, let me try to answer that question for you. When we talk about the efforts for cost reductions this year, it's really around the future generation of system under design and what allows us to plan for these types of reductions is really based on the nature in which we are going about designing these systems and the collaboration we have with suppliers around [Inaudible] . Our supply base is involved much earlier in the process of designing this generation of systems and the supply base was involved in the generation that is [Inaudible] .

Second, we are much tighter with them in terms of sharing what the system requirements are, not just the specific components that they were looking at. So, a lot of the ideas for cost reductions are coming from the supply base, I think, but when we think about overall thermal management of the fuel cell system as opposed to one or two specific exchanges, and so, by giving them a broader look at the system having tooled model and reflect on the ideas that are coming back -- that puts us at a big advantage.

Also, we are drawing from the -- I would call that a stronger and a broader group of suppliers. So, the skills and the technologies that -- and the resources that supply base will bring to bear on the future generation systems coming from companies that are much larger, more experienced, and [Inaudible] , if you will, on the whole in their work with supply base for the SU-1 generation of the product. All of that has led to much improved design that we believe will show up quantified results not only in cost, but obviously in the other post-metrics of performance attributes [Inaudible] .

You mentioned as well, how you are getting more customers, or potential customers on a strategical (ph) [Inaudible] marketing and distribution side, but also in -- are you seeing one getting more opportunities or companies coming at you on the supply side that [Inaudible] in the past?

Yes, absolutely. We have supplier symposiums every few months where we bring in the key suppliers for the future generation of systems and that number of companies is, I think less than 20. The breadth that they have is across almost every major piece of our system, in fact it is across every major piece of our system. And the magnitude of these companies, if you will, is also significantly higher. So, most of them are companies that would be more recognized [Inaudible] of the companies that have clearly stated that they are involved in fuel cell development and that they want to make these investments in collaboration with Plug because of this broader interest in assessing the overall industry launch.

David, one of the things that we do is we share the information in the field and we ask them what do they make of these data. How would they help back with their modeling groups and their design groups. Directly to your question, in amplifying what Greg has already said, we do receive regularly phone calls from suppliers who want to become part of our supply base, any of whom know that in the immediate next generation of products, we've made strong commitments to our current suppliers and reduced number from the SU-1. They understand that, but they want to be involved in the activity with us for future products. So, we find that very encouraging. The signal from them, basically is, they see an industry emerging and they want to be attached with those people who they think are most likely to survive.

It's not only end-market or supplier markets specifically be it autos, chemicals or anything like that. Where you're seeing proponents of suppliers forming?

I think a lot of the suppliers are people that are in and around automotive and in and around precision manufacture. Obviously some of that precision manufacturing goes into automotive but there's people that serve aero space industry and people that serve electronics industry that are highly interested in [Inaudible] technology and as Roger said working with us because of the position that they believe we have.

And one final question as far as your product. When you talk about cost reduction, can you talk in terms of components at all that are in the system?

In the numbers of component?

Yeah, like is that gone down?

Yes. The short and quick answer to that is yes. Should we stop there? We're looking for opportunities to have modules delivered to us, small modules right now but certainly integration of part reduction is fixed of attachments. We're looking at simplification. If there was one word, one rule that we follow is [Inaudible] razor. We feel like the most reliable part is the one that's not in the system and second to that where you can make one part do the activity of the requirements of two or three or more parts. We need to design that part as quickly as possible. And that's where the creativity in our supply base has really been helpful to us. They see it as a natural flow of their years and years of experience.

Okay. That's great. Thanks guys.

Thanks.

Thank you very much. This will conclude our call today. We hope that you found this session informative and we look forward to having you join us next quarter for another update.

Thank you for participating in today's conference call. This call will be available for replay beginning at 12 noon Eastern Time today till 11:59 PM Eastern Time on Tuesday, March 4, 2003. The conference-id number for the replay is 7546617. Again, the conference-id number is 7546617. The number to dial for the replay is 1800-642-1687 or 706-645-9291. This concludes the conference call. You may now disconnect.