FuelCell Energy Inc. F1Q09 (Qtr End 1/31/09) Earnings Call Transcript

| About: FuelCell Energy, (FCEL)

FuelCell Energy Inc. (NASDAQ:FCEL)

F1Q09 Earnings Call

March 11, 2009 10:00 am ET

Executives

Lisa Lettieri – Vice President Investor Relations

R. Daniel Brdar – Chairman, CEO

Joseph G. Mahler – Senior Vice President, CFO

Analysts

Sanjay Shrestha – Lazard Capital Markets

John Quealy – Cannacord Adams

Robert Stone – Cowen & Company

Brian Gamble – Simmons & Company

Walter Nasdeo – Ardour Capital

John Roy – Janney Montgomery

Jeff Osborne – Thomas Weisel Partners

Operator

Welcome to the FuelCell Energy first quarter 2009 results conference call. Today's call is being recorded. At this time for opening remarks and introduction, I would like to turn the call over to Miss Lisa Lettieri, Vice President of Investor Relations.

Lisa Lettieri

Good morning everyone and welcome to FuelCell Energy's first quarter results conference call. Delivering remarks today will be R. Daniel Brdar, Chairman and CEO and Joseph G. Mahler, Senior Vice President and CFO.

Our earnings press release is posted on our website at www.fuelcellenergy.com and a replay of this call will be posted to our investors at conclusion. The telephone numbers for the phone replay are listed in the press release.

Before proceeding with the call I'd like to remind everyone that this call is being recorded and that this presentation contains forward-looking statements including the company's plans and expectations for the continuing development and commercialization of our FuelCell technology.

Listeners are directed to read the company's cautionary statement on forward-looking information and other risk factors in its filings with the U.S. Securities and Exchange Commission. Now I'll turn the call over to Dan Brdar.

R. Daniel Brdar

Thank you everyone for joining the call this morning. As you're aware, the world continues to be affected by serious global economic recession. Like most companies, we're also affected by this situation and are taking steps to manage through the downturn that we'll discuss later in this call. That said, where there is crisis, there can be great opportunities too; that is for companies ready to pursue them.

We continue to take steps to position FuelCell Energy to capture the growing world wide demand for clean energy. Let's turn the call over to Joe Mahler, our Chief Financial Officer so he can discuss the financial moves we've made and I'll discuss what's going on in our markets before we take questions.

Joseph G. Mahler

Good morning everyone. In the first quarter of 2009 product sales were almost double last year's first quarter and the cost ratio improved by 24% and was in line with our expectations. Total revenues were $21.7 million, a 45% increase over last year's first quarter. Product sales and revenue increased 94% to $19 million from $9.8 million in the year ago quarter.

Revenues continue to improve due to the increased production of megawatt class power plants compared to the prior year. The company's product sales as of January 31, 2009 including long term service agreements was $70.9 million compared to $84.7 million as of January 31, 2008 and $87.6 million as of October 31, 2008.

Research and development contract backlog was $23.1 million as of January 31 compared to $13.2 million at January 31, 2008. In January, the Department of Energy awarded the company Phase Two of the Megawatt class coal based solid oxide fuel cell contract, a $30.2 million contract of which $21 million will be funded by the Department of Energy. The contract extends through September 20, 2010.

Research and development contract revenue was $2.7 million in the first quarter compared to $5.32 million in the first quarter of 2008. This was primarily due to the completion of several government programs in the second half of fiscal 2008 and the transition to the new DoE contract I just spoke about.

First quarter net loss to common shareholders was $20.7 million or $0.30 per basic and diluted share compared to $18.7 million or $0.29 per basic and diluted share in the same period last year. Net loss increased as higher volumes of product sales and revenues resulted in increased operating losses, but at a slower rate as per unit production costs have declined.

The product cost to revenue ratio improved by 24% to 1.52 compared to the 1.99 reported in the prior year and comparable to the 1.54 in the fourth quarter. The improved product margin is primarily attributable to increased production of lower cost megawatt class power plants. We expect this cost ratio trend to continue over the next several quarters and then decline with the production of our first gross margin profitable products beginning in the third quarter.

By the end of our fiscal year, we should have cost ratio of 1.1 to 1.3, representing solid progress towards profitability.

The company had high cash use in the first quarter that we expect to offset with lower cash use in the second quarter and the remainder of the year. Accounts receivable increased to $30.4 million as of January 31, 2009, compared to $16.1 million at October 31, 2008 due to the delay of certain customer payments that were pushed into the second quarter. We collected these receivables in February.

The company is also experiencing delays in closing orders that we believe are related to the macro economic conditions which affects our cash assumptions. We continue to work these contracts with targeted closure dates in the second quarter.

The resulting cash use in the quarter was $36.1 million compared to $15.1 million in the first quarter of 2008. Total cash and investments in U.S. Treasuries were $50.8 million as of January 31.

With the February collection of receivables, and expected closure of orders in March and April, we expect to end Q2 with a cash balance at or above our current level.

Our 2009 budget targets cash use of $35 million to $45 million compared to the prior year total of $66.7 million. This reduction in cash use is expected to be achieved through order flow, maxing the company's 30 megawatt production rate which is expected to generate a working capital benefit of approximately $10 million to $15 million compared to 2008.

We believe we have good visibility to this order flow from Korea, Connecticut and California which Dan will cover in more detail, lower capital spending by approximately $3 million to $4 million, company wide reduction saving approximately $6 million to $7 million and other improvements in working capital and operating margin totaling $3 million to $6 million.

In February, we implemented company wide cost saving measures including a 6% work force reduction, the suspension of employer contributions to the 401-K plan, a freezing of salaries except for production employees and general reductions of other expenses company wide. With these actions and a gross margin profitable product going into production this year, our business plan calls for continued reductions in cash use as we enter 2010.

Now, let's turn the call back over to Dan.

R. Daniel Brdar

The cash conservation actions that Joe discussed enabled us to push ahead with this year's most important initiatives while trimming expenses in other areas to address the fact that we're in a recession. We're being conservative with our cash and at the same time, we're managing the business to meet demand for alternative energy power production.

As I said at the beginning of the call, the demand for our products is stronger than ever. Let's go over a few of the near term opportunities we believe will result in orders during 2009 sufficient to support our current 30 megawatt premier run rate.

One of our key markets, our largest market right now is South Korea, a leader in proposing clean energy projects as a way to stimulate economic growth and create new high quality jobs. In fact, the government of South Korea made FuelCell deployment a top priority because they recognize stationary fuel cells ability to put 24/7 ultra clean efficient power where it's needed with a minimum of disruption to the surrounding neighborhood.

Our manufacturing and distribution partner in Korea, POSCO Power completed its 50 megawatt capacity balance of plant manufacturing facility last fall, a significant investment that demonstrates its commitment to stationary fuel cells. The facility is now operational and POSCO is in the process of building their first units that will incorporate a fuel cell module from fuel cell energy.

We're also working together to establish the Korean service operation to train POSCO's personnel to manufacture and service the balance of planned equipment. As a result of the continuing strong demand from Korea, we're currently in discussions with POSCO regarding their fuel cell module requirements for 2010 delivery.

In Connecticut, the state implemented Project 150 designed to get the first 150 megawatts of clean renewable energy under contract as part of the State's Renewal Portfolio Standard, or RPS. We're negotiating contracts from the round two solicitations for the Milford 9 megawatt DSC ERG and the 7.2 megawatts of hospital power plants.

These orders when final will be for 6 DSC 3000 power plants, the 2.8 megawatt showcase of our product line. These will be the first domestic installations for the DSC 3000 power plant. We already have DSC 3000's in South Korea and are looking forward to getting started on the Connecticut projects.

For round three of Connecticut's RPS program, the Department of Public Utility Control issued a draft decision in January approving 6.6 megawatts of projects based on fuel cell energy power plants. Yesterday, the DPUC issued a revised decision significantly increasing the total projects to 27 megawatts all based on FuelCell Energy's DSC 3000 power plant.

The 27 megawatts of approved projects now include the following five selections; a 3.4 megawatt DSC ERG power plant for a natural gas pressure let down station in Bloomfield Connecticut, a 14 megawatt DSC FuelCell power plant with an organic ranking cycle in Bridgeport Connecticut, a 3.2 megawatt DSC ERG power plant for a natural gas let down station in Trumbull Connecticut, and 3.2 megawatt DSC ERG power plant for natural gas let down station in Glastonbury Connecticut and a 3.2 megawatt direct FuelCell turban for a sub station in Danbury Connecticut.

Four of the five projects are based on FuelCell Energy's high efficiency cycles, the direct FuelCell ERG, and the direct fuel cell turbine. At approximately 60% electrical efficiency, they're one of the most efficient ways to generate electricity equal to or greater than large scale gas turbine cycle power plants. The DSC ERG and DSC turbine can offer up to twice the electrical efficiency of other distributed generation solutions that are typically only 30% to 40% efficient.

The fifth project, a 14 megawatt Bridgeport FuelCell park will be the first multi-megawatt commercial combination of our FuelCells with an organic ranking cycle, also a high efficiency solution.

The electrical efficiency of these projects compares very favorably to the average U.S. central station fossil fuel combustion plant at 33% efficiency. Because of its high efficiency, customers will use less fuel to make a kilowatt hour of electricity and significantly reduce the greenhouse gas emissions, all very important attributes these days.

In total, these projects represent a potential of $84 million in product revenue once they are under contract.

Following the final decision by the Public Utility Commission currently scheduled for early April, our project partners are ready to enter negotiations on the contracts and get the orders closed so they can earn the revenue and the tax benefits these projects provide. The projects selected in round two and three represent a potential of 43 megawatts of orders just for Connecticut.

In California, Bridgewater Treatment Facilities continue to be a strong market for us. These customers produce their own bio-gas as a waste product from their facilities. The bio-gas is often flared, brought to a boiler to produce steam or used to run combustion based engines to product electricity, all of which produce high levels of harmful pollutants.

With the advent of stringent [knocks and socks] regulations our FuelCells are becoming the preferred solution for these facilities. The FC Fuel Cells don't burn fuel like conventional combustion technologies such as engines and turbines. As a result, our FuelCells produce negligible levels of [knocks, socks] and particulate matter.

This allows them to be exempt from an environment permitting in most locations. They're also much more efficient than engines and turbines allowing them to produce more kilowatt hours of electricity with the same amount of fuel.

Additionally, the high temperature heat by-product from our FuelCells is sent back to the waste water treatment facilities, enter digester to help process the waste, resulting in a combined heat and power efficiency of up to 80%.

As a result of these advantages and the successful operation of units at multiple waste water treatment sites, we now have several megawatt class orders in the last stages of negotiations. While municipalities have been moving very slowly in the current economic crisis, revisiting the capital plans and slowing their spending, we're seeing the FuelCell projects in our sales pipeline come through this process as good investments for the local waste water treatment entities.

We now have projects in California going to city councils or county boards for approval. We would expect these to result in orders in the near term.

Given all the activity in our key markets, we do expect to close enough orders in fiscal 2009 to maintain our 30 megawatt run rate. At the same time, these megawatt class orders will be gross margin profitable an important milestone for our company that means we'll use significantly less cash to operate our business going forward.

As you may recall, last quarter we announced that we achieved our 20% cost reduction goals by releasing a new design for our megawatt class products. This was achieved through an increase in the power output from 300 kilowatts to 350 kilowatts per stack along with better component and raw material pricing from increased volume and global sourcing.

We are firmly on track to have these designs in production in the July time frame and realize the cost reductions from the new designs. As we continue to increase volumes, we will lower per unit costs even more from favorable component and raw material pricing and more efficient manufacturing.

Due to the increase in focus on efficiency and greenhouse gas emissions both in the U.S. and around the world, our engineering efforts this year are focused on the design of our high efficiency multi-megawatt DSC-3000 turbine. This product is based on our sub megawatt demonstration and multi-megawatt design work both conducted under programs sponsored by the U.S. Department of Energy. The DSC-3000 turbine will incorporate all of the cost reductions achieved last year in the DSC-3000.

The first installation is expected to occur in Connecticut as a result of the round three selections. The product is very well suited for a high fuel cost markets such as Asia, and utility scale applications around the world.

With the passage of the American Recovery and Reinvestment Act last month, there are now billions of dollars to support the deployment of FuelCell projects in the U.S. The changes to the Federal Investment Tax Credit alone will enhance developers' ability to do more projects and complete them more quickly.

The bill also puts an emphasis on projects that can go into operation within the next year or two. FuelCell projects are definitely ready. Order we take in 2009 can be installed an operational in 2010.

A third provision of the bill establishes a new accelerated depreciation schedule for clean energy projects that will significantly shorten pay back periods for FuelCell projects. In addition there is about $10 billion being allocated to specific programs that FuelCell project developers can apply for, much of which will be allocated by the Department of Energy and the Department of Defense, organizations we've worked with throughout our 40 year history.

In fact, two of our most recent announcements were about contracts awarded to us by these agencies. The $30.2 million solid oxide FuelCell research contract was awarded by the U.S. Department of Energy, and an order for a FuelCell power plant at the Marine Base at 29 Palms came through the Department of Defense.

In closing, we're on track to close several megawatt and multi-megawatt orders in 2009, all of which are expected to be gross margin profitable. Our cash use of an estimated $35 million to $45 million will enable us to capitalize on these opportunities while we continue to reduce costs.

We are very simple, managing the business to meet demand in a challenging economy, and we expect to see solid results for fiscal 2009.

At this point, I'd like to open up the call to questions from our listeners.

Question-and-Answer Session

Operator

(Operator Instructions) Your first call comes from Sanjay Shrestha – Lazard Capital Markets.

Sanjay Shrestha – Lazard Capital Markets

What exactly changes their decision? Is this sort of like the early signs of benefit that we're going to start to see from the stimulus package because this is arguably shovel ready project or can you talk about that a bit more?

R. Daniel Brdar

Your reaction is right on target. The State of Connecticut and others are looking at stimulus activity, look at the potential to bring stimulus to our State and one of the best opportunities to do that is to get some projects going that can be delivered near term. That creates job benefits plus creates job benefits for developing equipment also.

The other piece of it also is, I think the Public Utility Commission looked at the legislative requirements and realized that the time frame to do another round of solicitation, they probably were not going to be able to get the 150 megawatts under contract by October, so that combined with the stimulus drove them to say, "Let's increase the awards in this round and just skip round four altogether."

Sanjay Shrestha – Lazard Capital Markets

So in terms of actual 40 plus megawatts hitting the backlog, so we've still got to go all through the financing process and you know all the formalities before they hit the backlog so the likelihood of them hitting the backlog is at least a quarter or two away. Is that still fair?

R. Daniel Brdar

The 43 megawatts, 27 is in this current round. There is about 16 that's in round two, and those are actually pretty far along in the negotiation process so we would expect to see the first 16 near term and then the 27 that were announce yesterday will probably take another quarter to get that wrapped up.

Sanjay Shrestha – Lazard Capital Markets

In terms of the cash flow situation, obviously it sounds like for the next three quarters cash flow is going to be down pretty dramatically. I think it's the working capital benefit, cost reduction and can you walk us through that a bit more so there is a level of comfort there given the environment we're in.

Joseph G. Mahler

The cash flow, what we've done is we want to maintain our 30 megawatt production rate. If we can get order flow to marry up to that 30 megawatt run rate, we believe that we can get to this target of $35 million to $45 million. We've done, like you just said, we've done working capital adjustments, we've done some cost reduction. We've cut the 401-K plan.

We think the combination of that, but it really narrows down to a very simple thing. We just need to keep putting order flow into the system and then we should be able to manage our cash pretty well, and we have very good visibility as to what that order flow is.

Sanjay Shrestha – Lazard Capital Markets

I just want to make sure I'm reading this right, so you already burned $30 million, so really we're talking about another $5 million to $15 million, sort of talking about that whole taking cost out, benefit finally materializing in capacity utilization and the path to profit being a lot more clear for you than it's ever been. So it's basically all the things you've done sort of coming to benefit.

R. Daniel Brdar

Exactly. So its all those things. We've affected all of those things. They are all happening and what we need now is similar to this announcement in Connecticut is, let's get stimulus moving a little bit. Let's get a little bit of confidence in the market places and we thing the order flow comes.

Operator

Your next question comes from John Quealy – Cannacord Adams.

John Quealy – Cannacord Adams

Could you talk about the visibility of cash receipts, maybe give us a sense of the number of contracts that were delayed this quarter and then just kind of walk us through the milestone payment process.

R. Daniel Brdar

The contracts that we would put into that category that we were expecting would include several contracts that are coming out of California that are very far along. These would be municipal based water contracts. We believe we are very close on those contracts and we would expect those to close.

The other ones are the 16 megawatts around two. We see those contracts continuing to work to closure. We have not seen anybody pulling back. The message is clear to us that people want to move. These customers want to move FuelCells. We do see a little bit of hedging in the economy. People are looking at their capital requirements two and three times over, so I think a little bit of momentum just will kind of relieve the bottleneck and we'll see these orders come through

So I think there's 16 megawatts in Connecticut that we're focused on and there's probably 3 to 5 in California right now that we're focused on immediately, and then following that you would have the round three work we're going to do. Obviously the news that came out today, and then you have backing all of that up, you have the Korean order which time wise, we got our 2009 order from the Koreans last April, and we would expect similar time frame for their 2010 order and we see all indications being positive coming out of Korea right now.

John Quealy – Cannacord Adams

You talked about the stimulus spending, but maybe talk about if you're seeing any impact from that yet on an RFP activity, etc.

R. Daniel Brdar

We are actually. One of the things that we went through in the last couple of weeks is we were working with some folks in the administration who are looking for a list of shovel ready projects, so we have several that are pretty far along that we put in. Because what people that are handing out the stimulus dollars are looking for, is they need to get the money out and they want to be able to show an immediate impact with what they're doing.

So they are actually, I think the stimulus dollars are really going to play a role in helping take some of the uncertainty out of some of the customers that we see in terms of delaying their spending.

And we're also seeing in terms of just direct order flow from the government to us; the recently announced order for the solid oxide program and the order we announced for 29 Palms, and we think there will be more orders particularly on the DoD side that we're going to see hopefully in the near term here as a result of stimulus dollars.

Operator

Your next question comes from Robert Stone – Cowen & Company.

Robert Stone – Cowen & Company

It sounds like there are a lot of things potentially coming. Do you think you could finish the year with backlog back up to prior levels or how are you feeling about order intake versus shipments this year.

R. Daniel Brdar

I think we could definitely finish with backlog back up to prior levels, and we would hope to do better than that.

Robert Stone – Cowen & Company

I wonder if you could just go through, I didn't quite catch it, you described the trend in cost to revenue reduction, and I thought you said it would stay level for several quarters, and then improve from Q3 but there's only two more quarters to get to Q3 if you could just walk through the sequence on that one more time please.

Joseph G. Mahler

What happens is that the gross margin profitable units really start in production late in the third quarter so the impact that you'll see coming through the financial statements really occurs in the fourth quarter. But the actual production begins in the third quarter. So you could see a little bit of transition in the third quarter, but you should see the real impact in the fourth quarter.

Robert Stone – Cowen & Company

In terms of the shipment mix on the full fiscal year of megawatt class versus sub megawatt class, would you care to take a swing at that?

R. Daniel Brdar

Let me tell you more of what's in our backlog and the primary units that are in backlog right now are the two megawatt plants are the biggest amount. There's about 12 megawatts of those that are in our backlog. There's a little over 2.5 megawatts of 2.4 megawatts of one megawatt plants and then the remainder are FuelCell modules. So that's really the mix at this point.

Robert Stone – Cowen & Company

So it's not so much a shift from sub megawatt to multi as it is to the production of the new design, the higher capacity stack?

R. Daniel Brdar

Exactly. Once we work off our inventory of the older megawatt design, and you move to push the new design through production, it becomes pretty straight forward.

Robert Stone – Cowen & Company

What do you see in terms of an impact on pricing from the steep falling in natural gas prices? Is that helping your customer returns analysis any and how are prices trending?

R. Daniel Brdar

I think what it does first and foremost is it relieves some of the uncertainty of customers making decisions because it's pretty clear I think to most people that are looking at it that we're going to see relatively lower fuel prices compared to recent history in quite awhile.

So what I think was scaring people more than anything else at one point in time was volatility. Now with just the current economic conditions it looks like fuel prices are going to remain depressed. That just raises the comfort level of the customer about looking at moving forward. We would hope over time to be able to start to capture some of that end price as we start to see customers' confidence that they can lock up a long term supplier, but for now it's really just relieving some of the concerns customers are having just in terms of placing orders.

Robert Stone – Cowen & Company

With respect to shovel ready, I noticed you have shovel ready in round three approvals and then orders, do you think that round three business could actually be booked and shipped before the end of fiscal 2010? Is that the thought on shovel rate or does some of it carry over till later?

R. Daniel Brdar

Our hope would be to have it booked and shipped and installed in2010.

Operator

Your next question comes from Brian Gamble – Simmons & Company.

Brian Gamble – Simmons & Company

Booked, shipped and installed in 2010 would be impressive. I hope that comes to fruition. I know that depends on a lot of other counter parties beside yourself, so I hope that they can continue to appreciate the timing of this and continue to move down that path.

On the cash flow, could you give us an indication of what the cash burn would have been this quarter if the orders that you had expected to come through came through. I know you went through what they were, but could your quantify that?

Joseph G. Mahler

Cash would have been in that range, $15 million to $20 million range that we did on a quarterly basis. It would have been right there. Understand the play in the payment, we had a large milestone payment that delayed, literally came in the next day after the quarter, and then other than the delay in what we think in the contract closure process, it would have looked like a very normal quarter.

Brian Gamble – Simmons & Company

Just trying to get to a normalized quarter run rate, so if you did $18 million for Q1, and you're talking about your range for the full year, that kind of gets you to almost a single digit type of number going forward on a normalized basis?

Joseph G. Mahler

That's exactly right.

Brian Gamble – Simmons & Company

The April time period for the final decision, I just with an original draft and a revised draft and then a finalized date that's not too far away, what is your hope that that actually sticks in April versus getting pushed into early summer?

Joseph G. Mahler

My hope is they would actually hit a date for a change. They're getting pretty late in the process and the hearings that surrounded these projects have already happened so it seems unlikely that there's going to be a long delay. I wouldn't be surprised if the date by a week or two because what happens is the docket at the PUC gets forwarded and they just don't always get to every item.

But they seem to actually want to get this thing wrapped up and move on to the next round of what they're going to do in the RPS program, and they do have to have these things done and supposedly under contract based on the directive from legislation for October. So they don't have a lot of time to push this stuff out.

Brian Gamble – Simmons & Company

I think the release actually said it was supposed to be done by October 1, 2008. Was that a misprint and it's actually '09 as you're speaking.

Joseph G. Mahler

The original was October of '08 and they're just getting a lot of pressure to get things done from the legislature.

Operator

Your next question comes from Walter Nasdeo – Ardour Capital.

Walter Nasdeo – Ardour Capital

I'd like to get some clarity on the assembly plant and when it's up and running and the implications for both revenue recognition and margin improvement as they start assembling everything over there.

R. Daniel Brdar

The only thing they're assembling is the balance of plant equipment so that facility is now operational. They're putting together their first unit and the way we did this was, we basically bought the parts and sent them to them, and they're going to assemble that balance of plant in their new facility, and they will eventually transition to buying that equipment themselves. What they get from us is a completed FuelCell module from our factory in Torrington.

So the order that we will get from POSCO and part of the order that we have now is for just those FuelCell modules which looks very much like our traditional orders. We get a down payment we get progress payments and a payment at shipment. In terms of how it looks coming to our books is not going to look a lot different because the balance of plant scope really just transitions to POSCO and the module represents about two-thirds of the cost of the power plant.

Walter Nasdeo – Ardour Capital

And that will be up and running by the end of this year then.

R. Daniel Brdar

They're currently up and running.

Walter Nasdeo – Ardour Capital

I mean at full capacity.

R. Daniel Brdar

Full capacity is a function of how quickly they close orders, how comfortable they are getting the thing wrapped up into what level.

Walter Nasdeo – Ardour Capital

What's going on in Europe?

R. Daniel Brdar

In Europe we are in discussions with our partner MTU looking at where we're going to go. As many of you people know, our arrangement with them ends in December of this year so we're looking at what our options are to try to develop that market a lot more aggressively than it has been because we think it's a market that is just really ripe for the deployment of FuelCells.

I suspect that in time we're probably going to do is look to bring on some other partners over there to help stimulate some competition and we've certainly had some pretty significant companies with European exposure that agree with us that there's an opportunity waiting to be exploited.

Walter Nasdeo – Ardour Capital

Just briefly, I know we've beaten up Connecticut quite a bit here, but just for my own clarification, 27.3, these are all FuelCell Energy projects? Those megawatts are all allocated to you?

R. Daniel Brdar

Yes.

Walter Nasdeo – Ardour Capital

We've gone through this with Connecticut a number of times where you've been awarded something and then modifications had to come in because somebody else had hurt feelings and what not. Are we pretty confident that this is not going to occur again?

R. Daniel Brdar

If you remember, in the earlier rounds where awards got scaled back. What got scaled back was a recommendation from the clean energy fund by the Public Utility Commission. This is the Public Utility Commission themselves revising the award upward for us. So this seems pretty likely to actually go to fruition as it was announce yesterday.

Operator

Your next question comes from John Roy – Janney Montgomery.

John Roy – Janney Montgomery

How much capital would it take to go to the next level of production? I know you're running at 30 and could you give us maybe a couple of steps ahead, because it looks like in 2010 you're going to need more obviously than 30.

R. Daniel Brdar

We're currently operating at 50 megawatts capacity. The run rate is 30 megawatts, capacity is at 50 megawatts. There's a two step move we can make. One step would be to go to 70 megawatts of capacity. It takes reasonably low capital somewhere in the $4 million to $7 million range, and then the next move would be approximately 150 megawatts and to get to that level would be somewhere $35 million to $45 million including that $4 million to $7 million.

So that's the steps that we have planned for and that we are just awaiting order flow to make that decision.

John Roy – Janney Montgomery

And you're running at 30 now, so to run it at 50 is it just more shifts or what would it take to go from 30 to 50.

R. Daniel Brdar

Bring more people in and operating the shifts.

John Roy – Janney Montgomery

So obviously not a lot of capital to do that.

R. Daniel Brdar

There's no capital.

John Roy – Janney Montgomery

Would this approval of round three or increase in round three, do you think that's going to push the round two guys to get off their butts and sign something?

R. Daniel Brdar

We're actually seeing the round two stuff pretty far along so while it always helps to have stuff pressuring in terms of when you might get your unit, a couple of the projects are actually very far along in the process to get wrapped up and turn into an order here, so it's getting that last little push, that's the big thing.

John Roy – Janney Montgomery

And then once you get that directly, it would move into backlog.

R. Daniel Brdar

Correct.

Operator

Your next question comes from Jeff Osborne – Thomas Weisel Partners.

Jeff Osborne – Thomas Weisel Partners

I was wondering if you could address I think in round two there's a clear view biomass facility that was being debated about whether to move forward with that or if they're possibly retendering that process?

R. Daniel Brdar

As far as I know that project hasn't been officially cancelled but it seems to be having a lot of issues in terms of getting financing completed particularly in the current environment that's certainly gotten worse. I think that's part of what has motivated the PUC to increase the awards in this round because they're seeing that there's a real likelihood of some attrition on some of the biomass activities. But as far as I know, nothing's been formally announced about that project dropping out.

Jeff Osborne – Thomas Weisel Partners

I believe a couple of quarters ago there was a 3.1 megawatt facility with Lindy in California that was pulled out of the backlog. You mentioned a pipeline of 3 to 5. Is part of that pipeline the older Lindy facility?

R. Daniel Brdar

No. That project is in the works with getting reassigned to someone else. When we talked about 3 to 5 it does not included the Lindy activities.

Jeff Osborne – Thomas Weisel Partners

Could you mention, you gave the one megawatt and above two backlog, could you just comment on what the total megawatts are in backlog currently, and also what was shipped.

Joseph G. Mahler

25.3 megawatts in backlog and in the quarter we actually shipped 7.2 megawatts.

Operator

That concludes our question and answer session. I'd like to turn thing back to our speakers for closing remarks.

R. Daniel Brdar

Thank you everyone for joining us on today's call. On behalf of the management team, we look forward to speaking to you again next quarter.

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