Good day, ladies and gentlemen. And welcome to the FuelCell Energy Reports Third Quarter 2010 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 follow at that time. (Operator Instructions) I would now like to introduce your host for today's conference, Kurt Goddard, Vice President of Investor Relations.

Good morning and welcome to the third quarter earning call for FuelCell Energy. Delivering remarks today will be R. Daniel Brdar, Chairman and Chief Executive Officer; and Joseph G. Mahler, Senior Vice President and Chief Financial Officer. The earnings release is posted on our website at www.fuelcellenergy.com and a replay of this call will be posted two hours after its conclusion. The telephone numbers for the replay are listed in the press release. 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 FuelCell 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 U.S. Securities and Exchange Commission. Now, I would like to call -- turn the call over to Dan Brdar. Dan?

Thank you, Kurt and thank you for joining us this morning. Policy makers, power producers and energy consumers worldwide are turning to FuelCell because their unique attributes allow them to solve acute energy, environmental and business problems that other technologies cannot. Our FuelCell technology helps South Korea achieve their low carbon green energy goals, allows agriculture and municipal customers to transform waste problems into renewable energy solutions and generates reliable secure power for commercial and government facilities. We are the world's only manufacturer of commercial megawatt-class fuel cells for base load power generation. Our products provide energy solution because they use a variety of fuels like renewable biogas or plentiful natural gas to generate ultra clean base load electric power where it is needed. They do this more cleanly, quietly and efficiently than combustion-based technologies and they produce power continuously unlike wind and solar. Beginning in 2012, South Korea's renewable portfolio standard mandates close to 6,000 megawatts of additional renewable energy over the next decade. POSCO Power, our partner in South Korea, is expanding their facilities and we expect to capture a large share of this market. In the U.S., the problem solving abilities of fuel cells, Government incentives and loosening credit markets contribute to expansion in key vertical markets and multiple orders. We received three orders totaling 3.4 megawatts in the third quarter followed by three more orders in August totaling 2.6 megawatts for a total of 6 megawatts of products for commercial, government and utility projects. These actions point to increase in order volume in the near term as projects in our growing sales pipeline move to closure and we are taking steps now to preserve for producing higher volumes of our products. I’ll get into more detail about our results after, Joe Mahler, our Chief Financial Officer reviews the financials for the quarter. Joe?

Thank you, Dan, and good morning, everyone. FuelCell Energy reported total revenues for the third quarter of 2010 of $18.9 million compared to $23 million in the same period last year. Product sales and revenue in the third quarter were $16.2 million compared to $18.7 million in the prior year quarter and $13 million for the second quarter of 2010. Revenues increased over the second quarter on U.S. order flow. The company's product sales backlog including long-term service agreements totaled $79.8 million as of July 31, 2010 compared to $104.8 million as of July 31, 2009 and $75.5 million as of April 30, 2010. Orders received to date in the fourth quarter of 2010 will add $13.1 million to product revenue backlog. Product margins measured on a dollar basis improved over the prior year quarter by $3.7 million driven by sales of higher margin megawatt-class modules. The product cost-to-revenue ratio of 1.24 to 1 in the third quarter compared to 1.4 in the third quarter of 2009 and 1.47 in the second quarter of 2010. This improvement in the cost profile reflects continuing success in reducing product and manufacturing costs while enhancing the technology. Research and Development contract revenue was $2.7 million for the third quarter of 2010 compared to $4.3 million for the third quarter of 2009. The company's research and development backlog totaled $7.4 million as of July 31, 2010 compared to $15.3 million as of July 31, 2009 and $9.9 million as of April 30, 2010. The company has a number of DOE research and development awards worth about $5 million in contract negotiations and is currently proposing Phase III of the solid oxide contract to DOE with an estimated total value of approximately $30 million. Total cash and investments in U.S. treasuries were $67.8 million as…

Thank you, Joe. As we prepare for higher production rates on our path to profitability, FuelCell Energy’s business strategy is focused on driving product costs down while growing our key geographic and vertical markets. Our cost reduction program has successfully reduced the unit cost of our megawatt-class products by more than 60% and this is reflected in the improving margins in our financials. The confluence of both policy initiatives like the South Korean RPS and active and growing order pipeline in the U.S. and expansion in key vertical markets will drive orders and higher manufacturing volumes. In South Korea, our largest market, the RPS passed in March by the national assembly has created a strong market for fuel cells. Due to the high cost of imported fuel and the poor wind and solar profiles of the Korean peninsula, fuel cell has an excellent green energy solution for South Korea and the Government has designated fuel cells as a key economic driver. To accelerate the adoption of renewable energy alternatives, the South Korean legislature adopted a far sided and aggressive renewable portfolio standard. The RPS requires 350 megawatts of additional renewable energy per year for 2016 and 700 megawatts per year for 2022, accumulative target of nearly 6000 megawatts. Fuel cells fully qualify under the Korean RPS because they're extremely clean, highly efficient and can operate on natural gas or renewable bio gas. Our product transforms these fuels into electricity with up to twice the efficiency of conventional technologies resulting in significantly lower green house gas submissions because they do not combus fuel, our fuel cells emit virtually no harmful pollutions unlike combustion-based distributed generation. An ideal form of distributed generation, our products are easily sited due to the small footprint quiet operation and competitive costs compared with large conventional power…

Thank you. (Operator Instructions) And our first question comes from Sanjay Shrestha from Lazard Capital.

Hi. This is Sarah in for Sanjay. Can you discuss timing on the European partnership at this point and comment on the natural gas pipeline opportunity and some of the relationship you have with Enbridge there?

Yeah. On the European partnership, those discussions have been moving along. I would hope that we are going to have something done and announced by the end of the year. We are pretty well engaged with what we believe will be our first partner. And we’ve got some key meetings coming up with them that we are hoping to be able drive some agreements to closure. So I would expect that to be an event for this year. As it relates to the gas pipeline activity, the first significant opportunities for us here domestically are four projects that are part of the Connecticut portfolio, that are based on the FuelCell coupled with a turbo expander for the pressure letdown station. What's happening is the same time though is, Enbridge is working with the Government in Ontario to get the approvals that they need to get a satisfactory nighttime rate to begin installing the concept at their own facilities, because they have estimated there's about 47 megawatts, those megawatt class within their own facilities where they would like to deploy the concept. So, I think as they get through the last approvals with the Ontario Government on the rate structure, they will be ready to move forward with their own projects as well.

Okay. And would you expect the timing on the POSCO order later this year, or do you think that could be in '011 event?

No. I think it will be this year.

Okay. Thank you.

We are already in those discussions as we speak.

Great.

Our next question comes from the line of John Quealy with Canaccord Genuity.

Hi guys, Mark Seagull for John. Just wondering, with an increased volume of units out in the field and shortly to be out in the field, can you talk about any needs you might have for ramping up staffing, maintenance and support operations or are things good there?

The service infrastructure we built is pretty robust. We made sure that we had the regional part storage that we had really good capable service people involved and we had the systems and tools in place to be able to monitor the units remotely. As the market grows, we will certainly add people to those functions but near-term we are really ready to respond to that. As we ramp up the business here respond to the order flow, the immediate demand for us in terms of people is really going to be in a production facility itself, just to enable us to flush out the rest of the second and third shifts at our facility in Groton.

Okay. And then there’s been a lot of resurgent talk recently within the industry, particularly given competitive dynamics. Has this chatter changed any of the conversation you are having either with potential strategic partners or perhaps even key suppliers?

I think there's certainly, there's an increasing awareness. If you think about sort of how industries have evolved there in terms of energy space, wind was certainly the industry that penetrated the market and matured first. Solar came right behind them and FuelCell now seem to be the next wave, particularly as we are seeing the policy makers and a lot of the key markets openly talking about the challenges that are created by these intermittent solutions and the need to have something as clean and base load. A lot of people that we are talking to as potential project partners are involved in doing projects that are wind and solar base, so they understand that there's a real need for some kind of a clean base load. So I think it is really just raising the awareness of where fuel cells fit in to that portfolio, because there's clearly sort of a third leg of the store that's needed and there’s not any other technology that can really fill that ultra-clean continuous duty high efficiency gap. So I think it’s a good thing that we are seeing some more activity in the marketplace and we are seeing sort of some new players emerging, because it is helping to raise the awareness level where FuelCell as a whole fit into the energy mix.

Okay. And just lastly, can you talk a bit about utility appetite for fuel cells? Are utility -- are your discussions with utilities increasing in volume or are they sort of hanging back to see how things go with PG&E?

If you think about the utility side, Korea really is a utility play. The projects that are being put in are all megawatt and multi-megawatt class. They are all being put on to the actual transmission system, where all of the power is being exported to the system. And that's being done through the generation companies. So the Korean utilities, the first one that have embraced the concept, here in the U.S. we are actually behind the curve because from a demonstration concept, you look at Korea it’s got what is going to be the largest fuel cell power plant in the world is going to be operational here in a few months. I think and if you look at the domestic marketplace, it’s a little bit different picture whether you are on the east coast or the west coast. California, because it tends to lead in terms of energy policy, we are seeing the utilities there start to embrace the concept first , as they work closely with the utility commissions, I think the PG&E inflations will be important ones. We need to demonstrate for the utilities in this country that fuel cells really are viable at the multi-megawatt level that they perform like a true commercial product. But we are already seeing more activity that’s coming, as a result of those projects being announced. As other utilities sort of see the trend that's coming and we will be also finding some of the non-regulated arms are some of those utilities are some of the players that were in discussions with about, things like the Connecticut projects.

Great. Thanks a lot.

Our next question comes from Walter Nasdeo from Ardour Capital.

Thank you. Good morning.

Good morning, Walter.

[How you guys are doing]. I had just a couple of quick questions here. Can you let me know what the time to fulfill these orders is at right now and what your internal capacity is?

Our capacity is 70 megawatts of production. Depending on the, the customer or the lead times are anywhere from nine to 12 months depending on what customers needs are. Our approach has been with POSCO for example, they buy basically a year's worth of deliveries from us and then we spread U.S. orders in and among the units that they have ordered, specifically in places like California there's a time window when projects have to be in and operational under the rules of the incentive programs out there. So a typical lead time today is probably 10 months I would say.

Great. And you probably mentioned but I think I missed. When is POSCO’s plant going to be up and running?

They're on schedule to actually complete the facility by end of this year. Since, we are providing a lot of equipment for them, to some degree we are pretty close on that schedule in terms of standing what they want. When they're going to actually set the dedication facility, I suspect it will be after the holiday sometime.

Okay. And jump over to the DOE loan application, where are you in that process? I mean obviously it is a multi-tiered process with numerous approvals that need to be met. Where are you at in that process?

The way the program is set up, there's really two phases. You submit a Phase I application that has project information. You go through a review and to see if you are accepted or rejected. We have completed that phase successfully. Then we go into Phase II, we have to provide some additional information, typically have to spend little bit of money to get credit ratings for the projects themselves, those sort of things. We had submitted our Phase II application. We’ve got some questions back from them just looking for some additional information that they need to make their decision. We are expecting that Phase II decision basically at anytime now, because the discussions we have had with DOE have been very productive. They really – they were looking for information like, what are the performance guarantees under our contract, those sort of things that weren't requested as part of that initial phase II application. And assuming that we get the phase II approval, at that point you begin negotiating your term sheet and move to closure.

Okay. And then, is most of the Connecticut stuff continued upon this then, is that?

No. Actually, we have multiple paths here. We have -- there's 27 megawatts that are in the loan guarantee program. But we have multiple players that actually very deep in the due diligence process that would not be relying on the loan guarantee. So we’re really sort of working these paths in parallel. We’ll see which one of them happen first. Some of the players that we’re working with are actually interested in loan guarantee program and if they came through they would sort of pull that into how they’re structuring the projects, but they’re looking at them first on the standalone basis without a loan guarantee.

Got you. Thank you very much.

You're welcome.

Our next question comes from Pavel Molchanov from Raymond James.

Thanks for taking my question. Just kind of thinking conceptually about the market opportunity in the U.S., we’re at a point where the natural gas futures curve is around 5 bucks in Mcf. Given that and the potentially very appealing economics of your product that you’re -- what's the push back you're getting that’s preventing the kinds of adoption rates that you guys are hoping for?

The only thing that we’re really seeing in terms of push back is just customer’s willingness to spend the capital and in just such an uncertain economic environment. If you look at the things that are in pipeline, there are projects don’t disappear, they just -- some of them have just been delayed. And the message that we’ve been getting is, customers are feeling increasingly comfortable about two things. One is, that the volatility around gas pricing which can impact, distribute generations seems to be an issue that people aren't too concerned about. And people are getting the feeling that the access to financing for capital projects is significantly improving, which is why, if you look at the half dozen orders that we’ve announced here since the last call, we’re seeing that pipeline move more quickly to closure. Joe, anything you want to add to that?

No. I think generally, probably, on the credit side it’s just more optimism in the marketplace. We obviously got a couple of deals done this month where the customers were able to find credit. We’re seeing interest from more parties. And even most importantly is we’re seeing people coming at us looking to solve these business environmental problems, like the ag waste farm is solving a business problem and they see -- they're really beginning to understand FuelCell and that should drive it.

And I have a follow-up to that. Can you give an update on the kind of quarterly sales run rate in meg’s that you need to get to positive for, let's say, breakeven cash flow?

Yeah. It’s about -- on a quarterly basis it’s about 25 megawatts, so it is a 100 in total. So the assumption would be you’d have 100 megawatts on an annual basis, you’d have about, lets say, you can get 20% gross margin, we think we can get higher but be conservative for a minute. So you get, 20% gross margin on that 100 megawatts, it provides enough operating cash to support our below the line requirement, our below the line requirement is about $40 million right now. So that’s, it’s pretty simple math. We’re really right at the inflection point and volume will drive it that.

Okay. That's helpful. Thanks.

Yeah.

Our next question comes from the line of Amit Dayal with Rodman & Renshaw.

Thank you. Good morning, gentlemen.

Good morning.

Good morning.

Some clarification on this sales mix, we’re seeing more component sales happen over the last two quarters. Can you give us color on what's driving this and do we expect to come back to more power plant sales going forward?

If you look at the components, the component sales really is our activity with POSCO as they have or localizing the balance of plant equipment. The focus for us going forward with them will be to provide the components they need to make the FuelCell modules themselves. If you look at what's actually in our production mix, it is actually starting to come back to be more balanced as we shift things like the DFC1500 power plant, the Sonoma, this past quarter and the other things that we’ve got in the U.S. orders pipeline really help balance out the power plant for domestic applications versus components to POSCO to support their needs.

And in the backlog, we roughly have $92 million, I guess, how much of that is components?

Yeah. In the backlog, there is probably, I would say roughly half of that would be, well, I’m sorry, probably a third of that would be components.

And longer term assuming we get through 100 megawatt level, so that on the later like, what are the margins on the components side that you expect and margins on the power plant side if components and kind of that aspect?

Yeah. What we expect, we have proprietary technology here and we’re commercializing the business for entering the market. And where these margins are going to go is, you have a full power plant which consists of balance plant and this proprietary cell technology. So what you’d expect is that the cell technology will have high margins and that the balance of plant is much more mature, balance of plant is used on typical power plants, engines and turbine, it’s very similar type technology. So we would expect that component margins will be higher and overall power plants will be a little bit lower, I mean, that's what we’re looking for. We’re looking for an opportunity. A lot of things depend that the future turns out, as the future develops, what kind of competition will come in, what will the market pressures be, but for a company that's leading the pack and we’ll certainly have, what we believe is capacity constraints even as we ramp the business will have capacity expense, we have the ability to manage that margins, we’re thinking technology margins in a $35 to $40 even plus range for the components.

Okay. Thank you.

Our next question comes from the line of Scott Reynolds with Stifel Nicolaus.

Thank you. Just a couple of quick ones for me. I don’t know if you gave it or not, but what were the megawatt shipped in the quarter?

Megawatts shipped in the quarter were 8.4.

8.4. And now that's not too much volume but you had a nice step down in your product cost ratio. Now, is that some -- is that mostly from a technology improvement or is there a mix shift in there?

In this quarter, in the cost ratio we are reaping the benefits of the technology shift that we put into production in the summer of '09, so those numbers are clearly coming through the financials and we are on track now. I mean this is where we should be in terms of cost ratio and cost ratio should just continue to get better from this point. Volume, the more volume we put in on selling product will actually drive this to that one-to-one and then below one-to-one cost ratio.

Okay. And on the OpEx side there was a step down on $1 million, well, $0.8 million quarter-over-quarter, what was driving that?

Well, I mean, a couple of things are driving. We had admin and selling. So we have some incremental selling costs coming through. We have a little more focus in R&D dollars. We’re focused on R&D projects in this quarter. They see to go back and forth. We’re in a little bit of quarterly range between admin and selling and R&D. I would look at like $4.5 million on an average basis for admin and selling and about $5 million for R&D is about the right number. So, that's how I would look at it.

All right. Thank you very much.

Yeah.

(Operator Instructions) And we have a follow-up question from Sanjay Shrestha.

Hi. Just a follow-up on cash burn. Noticeable improvement in the quarter, looking forward, are we still looking at a 10 to 12 range or maybe better than that?

Yeah. I think we can start to look at the dynamic of this order flow coming in as we can close the pipeline and the cash flow will get better. The, in fact, you know as you bring, our working capital on the orders is pretty good as we get a nice down payment on the order flow and you can actually, in a quarter actually have a pretty substantial impact on reducing cash flow. But if you can get your run rate up, if you can get your run rate up to 50 megawatts and then to 70 megawatts, you’re in effect driving cash flow down. So if you’re operating at a 70 megawatt run rate you’re probably driving your cash flow in a range of 6 per quarter and that's what we’re looking for. I mean all the other factors are. All the cost reduction is played out. I mean, our ability to manufacture has played out and really, if you just drive volume the model works, I mean, the model absolutely works. We’ll reduce cash burn and then we just need to get to that in the K, we say 75 to 125 megawatts of throughput and at that point, we can go operating cash positive. So it’s really, at this point, we’re at the inflection point and lets drive some volume and lets move this business to profitability.

Thanks, Joe.

(Operator Instructions)

Okay. We’d like to thank everybody for joining us at this point and we look forward to updating you in next quarter because we think we’ve got some pretty exciting things coming we’d be talking about. Thank you everybody.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.