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FuelCell Energy, Inc. (NASDAQ:FCEL)

F4Q2010 Earnings Conference Call

December 14, 2010 10:00 am ET

Executives

Kurt Goddard – Vice President, Investor Relations

R. Daniel Brdar – Chairman and CEO

Joseph G. Mahler – Senior Vice President and CFO

Analysts

Sanjay Shrestha – Lazard Capital Markets

Mark Seagull – Canaccord Genuity

Scott Reynolds – Stifel Nicolaus

Walter Nasdeo – Ardour Capital

Matthew Crews – Noble Financial

Operator

Good day, ladies and gentlemen, and welcome to the FuelCell Energy Reports Fourth 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 be given at that time. (Operator Instructions)

I would now like to turn the conference over to your host, Mr. Kurt Goddard, Vice President of Investor Relations. Please go ahead.

Kurt Goddard

Good morning and welcome to the fourth quarter earnings 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 our press release.

Before proceeding with this 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 turn the call over to Dan Brdar. Dan?

R. Daniel Brdar

Thank you for joining us this morning. Ultra-clean, highly efficient and reliable, our FuelCell power plants are operating around the world in a number of diverse end markets ranging from utility grid support in South Korea to universities on both coasts of the U.S., to municipal water treatment plants in California.

While the year started slowly due to market pressure from the financial crisis, the fourth quarter ended strong with seven orders totaling 12.7-megawatts. Our pipeline of projects continues to grow as now the largest in company history, due to orders already in backlog, the number of projects currently in negotiation, changes in the broad macroeconomic drivers for our business, our success in product cost reduction and our ability to ramp production in response to these drivers. 2011 looks to be a year of returning to growth for FuelCell Energy.

I'll get into more details about these and other results after Joe Mahler, our Chief Financial Officer reviews the financials for the quarter. Joe?

Joseph G. Mahler

Thank you, Dan, and good morning, everyone. FuelCell Energy reported total revenues for the fourth quarter of $19.7 million compared to $20.4 million in the same period last year. Product sales and revenue in the fourth quarter were $17.2 million compared to $16.7 million in the prior year quarter.

The company's product sales backlog including long-term service agreements totaled $154.3 million as of October 31, 2010 compared to $90.7 million as of October 31, 2009 which is the highest commercial backlog total in the history of the company.

Product margins improved over the prior year quarter by $2.8 million due to lower product and commissioning costs. The product cost-to-revenue ratio was 1.21 to 1 in the fourth quarter compared to 1.39, 1.39 to one in the fourth quarter of 2009 due to lower product costs.

Research and Development contract revenue was $2.5 million for the fourth quarter of 2010 compared to $3.7 million for the fourth quarter of 2009. The company's research and development backlog totaled $9.7 million as of October 31, 2010 compared to $14.2 million as of October 31, 2009.

The company recently submitted a $34 million proposal to the Department of Energy for Phase III of the solid oxide FuelCell Development program and expect a decision in early 2011.

Total cash and investments in U.S. treasuries were $54.6 million as of October 31, 2010. Net cash used for the fourth quarter was $13.3 million; total cash used in fiscal year 2010 was $42.4 million excluding proceeds of public offerings of common stock, which is inline with our expectations.

Capital spending for the fourth quarter was .5 million and depreciation expense was $1.9 million. Turning to full year operating results, FuelCell Energy reported revenue of $69.8 million compared to $88 million for the prior year. Product sales and revenues were $59.2 million compared to $73.8 million for the prior year due to slow order activity in the first half of the year and the sales mix transitioning to FuelCell modules from complete power plants.

Net loss to common shareholders for the year-end October 31, 2010 was $58.9 million compared to $71.9 million for the prior year. Margins for product sales and revenues improved by $14.4 million over the prior year primarily due to sales mix of higher margin products and lower overall product cost. The cost ratio for the year 2010 improved to 1.32 from 1.45 last year.

We closed a number of sizable orders during the fourth quarter, which demonstrates very positive movement in the U.S. market with most of the orders coming from customers located in California. I would like to highlight that the financing used for these orders included publicly issued tax re-bonds, both equity and debt investments by external investors and commercial bank financing. The availability of financing utilized for the orders in California is encouraging from a market perspective.

Here in Connecticut we continue active discussions with multiple parties regarding financing for the 43.5-megawatts of Connecticut projects. We are also encouraged that there appears to be movement to expand the ITC tax grant program.

Looking ahead to 2011, we continue improvement in operating margins and cash use. During the fourth quarter of 2010, we increased production levels in response to order volume to 35-megawatts on an annual basis. And with additional order flow, would expect to increase that further.

FuelCell Energy has reduced product cost to the point that our products our gross margin positive, sales volume can drive us to profitability.

Dan?

R. Daniel Brdar

Thank you, Joe. FuelCell Energy strategy is focused on driving down product costs while expanding on our key geographic and vertical markets to grow volume. The combination of these two activities drives our path to profitability.

The orders received in 2010 were primarily from the U.S.; specifically California, which we believe, represents a reengagement of domestic market. On several of these projects, we saw a variety of financing structures used including traditional project financing, bonds, grants and tax credits as well as new distribution partners with their own sources of capital.

The improved availability of capital was instrumental in the ability to close those orders and appears to be driving a steady increase in our domestic sales pipeline.

In the U.S. market, our efforts during the first half of 2010 were concentrated on progressing orders in our pipeline, which produced good order flow in the second half of the year. As I said previously our pipeline is the largest in the company’s history.

During the fourth quarter, we received seven orders totaling 12.7-megawatts at FuelCell power plants, a more than three point’s increase over the third quarter.

For the year, we received U.S. orders totaling 16.1-megawatts, most of this in California including our first direct utility purchases in the U.S.

Our third quarter orders included two 2.8-megawatts DFC3000s which will be our first installations of this product in the U.S. In addition to these orders, there were additional domestic megawatt class projects in negotiation, which we expect to reach closure in the near term.

Our recent order flow and sales pipeline indicates the growing recognition of the need for base load renewable power and the need to use our newly found abundant and affordable supply of natural domestic gas as cleanly and as efficiently as possible.

BioFuel's Energy, a new partner that develops renewable energy projects, utilizing waste from municipal waste water treatment facilities ordered three power plants totaling 4.5-megawatts for what is our first directed biogas project, what of which biogas is generated in one location and then transported via pipeline to another location.

This is a model that we anticipate being replicated elsewhere due to the benefits of clean and efficient renewable base load power delivered in an economically compelling manner. Financing for the project includes renewable energy bonds, authorized by the California Pollution Control Authority, Commercial bank financing from U.S. Bank Corp., as well as state and federal grants.

We received two orders from UTS BioEnergy, another partner specializing in renewable biogas projects. And one of these, our 2.8-megawatts DFC3000 will be installed at a wastewater treatment plant operated by Inland Empire Utilities Agency, a municipal water district in California. And the second UTS BioEnergy project, a 1.4-megawatt DFC1500 will be installed at the San Jose, Santa Clara Water Pollution control plant in San Jose, California. Both projects will be fueled with renewable biogas from the wastewater treatment process and will operate in highly efficient (inaudible) heat and power configuration.

UTS BioEnergy will own the direct fuel supply power plants and sell the electricity to the hosting water authority under a 20-year power purchase agreement.

Eastern Municipal Water District, an existing customer in California ordered two additional 300-kilowatt DFC300 power plants for a new water reclamation facility they're building, following the districts purchase of three DFC300s in 2007 for a different facility. This order demonstrates this customer’s satisfaction with our products.

Our products make it possible for end users like Eastern Municipal Water District to meet their renewable energy goals and comply with strict, clean air emission requirements by using distributable electricity generated cleanly and reliably from renewable biogas produced at their facilities. These end users standards reduce reliance on the transmission grid and benefit from stable economically attractive long-term power costs.

The Rancho California water district order 1.4-megawatt DFC1500s fueled by natural gas to power a pump station. The districts decision was based on an extensive analysis of the alternatives to their existing natural gas fired internal combustion engines. They chose our DFC1500s because it emits virtually no pollutants and offers the most attractive economics based on life cycle costs, fuel savings and financial incentives.

Utility grid applications, powered by natural gas are expected to be a growing market in California. Our first utility order was received earlier in 2010, with two different power plants owned by Pacific Gas and Electric to be located on University campuses at California State University East Bay and San Francisco State University.

The utility will own the units and export their power to the transmission and distribution system. California State University East Bay will utilize the waste heat from the fuel cell to heat a swimming pool and the wastewater for landscape irrigation. San Francisco State will utilize the waste heat for facility management.

The California Air Resources Board recently certified our natural gas fueled 2.8-megawatts DFC3000 to meet its stringent, distributed generation emission standards. The DFC3000 is the only multi-megawatt FuelCell to achieve this certification. IDFC1500 and DFC300 are already certified, affirming the ultra-clean emissions profile of all FuelCell Energy products. The California Air Quality Management districts oversee the toughest, clean air standards in the nation.

In California, already a strong proponent of clean energy, policy makers and regulators are very supportive of FuelCells as renewable technologies like wind and solar are deployed more widely the need for clean base load technology, that complements these intermittent sources becomes more acute particularly base load power that utilized renewable biogas.

California continues to take steps towards the adoption of a fee tariff. The California legislature passed bills and the Governor signed in for law, two fee tariff programs designed to increase the adoption of clean, efficient energy. Once the fee tariffs are fully implemented by the California Public Utility Commission, they could enable FuelCell customers to sell excess electricity to the grid. The CPUC is currently working to set pricing for these tariffs and we expect to file a ruling in 2011.

Korea continues to be our largest market. Earlier this year the South Korean National Assembly passed a far-reaching renewable portfolio standard, which specifically includes FuelCell operating on biogas and natural gas. The RPS requires 350-megawatts of additional renewable energy per year through 2016 and 700-megawatts per year through 2022, accumulative target of nearly 6000-megawatts.

High efficiency fuel cells are an excellent green energy solution for South Korea due to the high cost of imported fuel and the poor wind and solar profiles of the Korean peninsula. Based on our meeting with POSCO Power Management, an announcement from the South Korea's Ministry of Knowledge economy appears imminent regarding the specifics of how the RPS will be structured, including pricing and utility penalties for non-compliance.

Because cells produce electricity, electric chemically, they emit virtually no harmful pollutants like combustion-based generation. Our fuel cells transform costly imported fuels into electricity up to twice as efficiently as conventional distributed technologies resulting in cost savings and lower greenhouse gas emissions compared to less efficient alternatives. When operating in combined heat and power configurations the byproduct heat can be used for commercial or industrial processes with system efficiencies reaching up to 90%.

The South Korean government desires clean, distributed generation power sources to supply their growing power needs while minimizing additional investment and congestion of the transmission grid. FuelCell addressed these needs and are designated as an economic driver due to their ultra-clean emissions, high efficiency and reliable distributed generation capabilities, which will help the country, achieve its RPS and electricity generation goals.

POSCO Power built a balance-of-plant facility in 2008, which is now operational providing Korean built balance-of-plant equipment for their customers. Currently they are constructing an adjacent facility where they will build fuel cell modules using components produced and supplied by FuelCell Energy. This facility is on schedule for completion and will begin operation early next year.

Demonstrating their long-term commitment to FuelCell technology and to our partnership, POSCO is building at initial capacity of 100-megawatts. Our team is working side by side with POSCO, both in South Korea and in Connecticut to provide expertise and training in the fuel cell modules stacking and conditioning process and to ensure their new facility is a success.

We received our last order from POSCO Power in June 2009 for 30-megawatts, which will be completed around fiscal mid-year 2011. In the meantime, POSCO's efforts were focused on developing and growing the market for fuel cells and building the capacity to meet expected demand. Due to the healthy market signals, they are now receiving from the Korean market and the lead-time for several key materials; we're now in detailed discussions with them on their next multi-megawatt order.

Building on our successful relationship with POSCO Power, we will jointly develop a small-scale direct fuel cell power plant for the Asian commercial building market. Our partner will fund the $5.8 million program in stages, initially funding $2.9 million for development of a smaller scale fuel cell module. POSCO estimates that the market for this product is substantial. They believe in the long-term it represents market opportunity comparable in size to the RPS program as it will be driven by government mandates for new and renewable energy use in buildings.

In response to our recent domestic order flow, we increased our production run rate to 35-megawatts per year. Following completion of the negotiations for additional domestic megawatt orders and our next multi-megawatt order from POSCO Power, we anticipate a further production ramp this fiscal year. We will provide additional details on the production run rate and progress in our production ramp in future calls.

The continued growth in our backlog, in our production run rate is a key part of our ongoing product cost reduction strategy. To date, our cost reduction program has successfully reduced the unit cost of our megawatt class products by more than 60%. As the volume increases, further cost reduction will be achieved through expanded global sourcing, higher volume purchasing, more competition among suppliers, an increased capacity utilization in our facilities.

In Europe, the first of our new partnering agreements is near completion. The agreement is with the European based company for the sale and service of direct fuel cell power plants in Europe, Africa and the Middle East. Europe is a collection of diverse countries and we expect to work with two to three different companies in order to capitalize on the renewable energy opportunities available in the region.

Research and development programs are building on the versatility of our fuel cell power plants and contributing to the development of potential UN markets. Our power plants can provide three value streams, including clean energy, high quality usable heat, and hydrogen. This hydrogen can be used for vehicle refueling or industrial purposes. We already have a demonstration program for vehicle refueling with our DFC-H2 hydrogen coproduction that will provide hydrogen for vehicle refueling station located next to a highway in Los Angeles, along with clean electricity and usable heat to a wastewater treatment facility.

The plant installed at Orange Country sanitation district is currently operating on natural gas and will switch to renewable biogas early next year. The unit will co-produce renewable hydrogen for vehicles in the Las Angeles area. We received a $2.8 million contract from the Department Of Energy to demonstrate hydrogen production for a metal processing application.

The power plant will produce clean electricity, heat and hydrogen to demonstrate the ability to reduce the cost of purchasing, transporting and then storing industrial hydrogen while providing clean electricity and usable high quality heat. The potential market for this technology includes more than 600 metal treating and (inaudible) companies in North America alone.

The second deal we contact valued at $2 million will fund the further development and demonstration of hydrogen compression and storage which will potentially expand applications for hydrogen such as power generation and vehicle refueling.

Under another deal we contract, we are working toward a long range goal of developing megawatt class solid oxide, fuel cell power plants fueled with coal-derived syngas thereby reducing greenhouse gas emissions from coal up to 90%. We successfully met or exceeded the technical and cost targets established by DOE for the first two phases of the program and our currently in discussion with DOE for the third phase.

Around the world, energy consumers and producers are turning to our products to solve their waste and energy challenges. Our products allow customers to economically transform waste into renewable electricity and allow businesses, municipalities and utilities to meet strict emission requirements while supporting customer clean energy goals.

As a result of the activities I just described, we're ending fiscal 2010 with the largest product and service backlog in our history at 154 million. In addition, we've achieved the lowest commercial product cost ratio in our history as well at 1.21 with our megawatt class products being profitable on a unit basis. Both of these key metrics are expected to continue trending in the right direction in 2011. We anticipate our sales backlog to continue to grow as domestic projects currently in negotiation are closed and announced in the coming weeks.

Also, we conclude, as we conclude the next multi-megawatt order with POSCO, to provide module components for their new facility, it will add substantially to backlog as well. In response to this order flow, we anticipate an additional production ramp in 2011 beyond our current level of 35-megawatts per year. With the South Korean governments pending announcement for their RPS, a potential extension in the U.S. to the IPC grant, the announcement of our first European market partner, and expanding sales pipeline, the continued eruption [ph] in product costs, 2011 looks to be positioned as a return to growth in our business and a significant step forward in our path to profitability.

Operator, at this time, we'd be pleased to take questions from our listening audience.

Question-and-Answer Session

Operator

[Operator Instructions) Our first question comes from Sanjay Shrestha of Lazard Capital Markets. Please go ahead.

Sanjay Shrestha – Lazard Capital Markets

Thank you. Good morning, guys. Congratulations on a great looking quarter and the cost reductions. A few questions, how should we think about the Connecticut product at this point in time? Where are we with the sort of the different type of financing arrangement for that and any sense you guys might have on what sort of timing we could expect before that thing turns from profit to backlog?

Joseph G. Mahler

Hey, Sanjay. It's Joe Mahler. I think we should think about it very positively. I think that the projects are good, the models are good. We're in very active discussions with financiers. Every once in a while you hit a little bit of uncertainty and in this case it's around the tax grant so we were actually moving out of the tax grant process into more tax equity scenario and then now it looks like the tax equity grant may be in play. So that would be a real positive for us in terms of getting movement. It has been a slow process. It's not going away and it should move forward.

Sanjay Shrestha – Lazard Capital Markets

Okay. Okay. Now so with the Connecticut opportunity at some 44-megawatts right and I think you guys sort of commented on another multi-megawatt order from POSCO, with the record backlog here how should we think about the volume ramp during next year and given the lead time we should be hearing from POSCO in the very near future, shouldn't we?

Joseph G. Mahler

Yes, we will. In fact the POSCO management team was here last week and we had several very productive days going through them briefing us on what's going on in their marketplace, what there own view is looking forward for the next two years and what their demand is going to be. Part of the concern that they had was with the Connecticut projects with the significant uptick in order flow that they've seen from us here in the last several months, they want to make sure that we're going to have the capacity that they need to respond to the market demands.

So it was a very, very productive discussion that really led immediately towards we have to collectively move pretty quickly towards closure to preserve the capacity they're looking for. As we announced both the coming POSCO order and the other things that we have in the queue that are near term for California, we'll be announcing the production ramp target that we're going to be going to and then we will provide color around that in terms of longer term, what do we need to do beyond the existing capacity.

Sanjay Shrestha – Lazard Capital Markets

So one point of clarification if I may? So this 35-megawatt capacity that we went to is just to support the existing backlog and depending on how large the order opportunity from POSCO is, so you guys plan to realize what that capacity need to be like?

Joseph G. Mahler

You are correct.

Sanjay Shrestha – Lazard Capital Markets

Okay, one last question from me, then guys. How do we think about your costs to revenue ratio in your existing backlog? Very nice steady progress there with down to 1.2 to 1.0 now, so in your existing backlog, what that number looks like?

Joseph G. Mahler

Yes, I think that number continue to improve Sanjay. As you know the units are profitable, thus on an individual basis we're still working off a little bit of that legacy service cost that will continue to exist in 2011 and into 2012 but we should be driving this much closer to one to one.

Sanjay Shrestha – Lazard Capital Markets

Okay, that's great. Thanks a lot, guys.

Operator

Our next question comes from John Quealy of Canaccord Genuity. Please go ahead.

Mark Seagull - Canaccord Genuity

Hi. Good morning, guys. It's Mark Seagull for John. First, housekeeping one if I may? What was the megawatt number shipped in the quarter and then a little further detail on the backlog and the composition there? Can you talk about the total megawatt number and the breakdown there between full systems and components?

Joseph G. Mahler

Our megawatts shipped in the quarter was seven megawatts. If you look at the product mix outside of service, it's almost evenly split now between the domestic market and what we're sending to POSCO. So we've come much more into balance between those two.

Mark Seagull - Canaccord Genuity

Okay and then just on the existing backlog, do you have a megawatt number there and a split between systems and components?

Joseph G. Mahler

Yes, its 33.5-megawatts would bet the total and then the split would be modules and module kits would be about 17 of that.

Mark Seagull - Canaccord Genuity

Okay. Great and then just a follow-up on California, given the pickup in order activity, just trying to get a sense of what the opportunity pipeline looks there? I know you've guys have commented on it in the past and it certainly seems to be improving so can you give us a sense of magnitude of the scale of projects that you're looking at right now?

Joseph G. Mahler

Sure, what's interesting is that with the amount of natural gas that's coming to the market, it's really given natural gas potential customers some visibility towards stable forward pricing. So even some of the projects we've announced, like the Rancho Water District are actually natural gas fueled units. That, combined with the pretty robust activity we've continued to see on the wastewater treatment side, is really making for a nice mix in terms of the opportunities for us. If you look at the 16-megawatt that we closed here in the last half of the year, most of that is California so it's not unreasonable to be thinking about California producing 20 plus megawatts a year going forward and the pipeline is clearly in place to support them.

Mark Seagull - Canaccord Genuity

Okay, that's great color. And then just lastly, how should we think about the cash burn going forward?

Joseph G. Mahler

Yes. The cash burn, last year we were talking 10 to 12 and we ended up with 42 so we were right on. As we move the production capability up, that should come down. So for example, as we move to say 50-megawatts, the cash flow should be something like six to eight a quarter, or you get to 70-megawatts, it should go down to three to four, three to five. So we can basically move the cash flow down. As orders come in, we'll also get incremental cash. In effect we get some of that, on the deposit we'll get the profit at the front end so that will also put some early cash into play

Mark Seagull - Canaccord Genuity

Okay and a sense of capital layout to move, let's just say from 35 to 50 or whatever the next planned level of production might be?

Joseph G. Mahler

Yes, it's pretty minimal. We're really doing mostly maintenance capital at this point in time. I mean our projections right now are somewhere, to get to 50 million would be somewhere $4 to $5 million, somewhere in that. So that's really mostly maintenance activities and that's included in the, when we talk about the planned cash use for the quarters, it's included in those numbers.

Mark Seagull - Canaccord Genuity

Okay. Perfect. Thanks a lot, guys.

Operator

Our next question comes from Scott Reynolds of Stifel Nicolaus. Please go ahead.

Scott Reynolds - Stifel Nicolaus

Thanks for taking my questions, guys. I might have missed this but the long-term service portion of the backlog, what's that number?

Joseph G. Mahler

The long-term service is 67 million.

Scott Reynolds - Stifel Nicolaus

Okay and of the other part, how should we think about that rolling off in the next 12 months?

Joseph G. Mahler

It should be within the 12 months.

Scott Reynolds - Stifel Nicolaus

Okay.

Joseph G. Mahler

So we basically can deliver in nine to 12 month period.

Scott Reynolds - Stifel Nicolaus

All right. Sounds good and hw should we think about OpEx on the next couple quarters seeing R&D down the last couple of quarters? Should we see that continuing?

Joseph G. Mahler

No, well it's basically within, it's within our range. I think for next year we're seeing a little bit of increase in both. In admin and selling, we want to add some sales capacity to that number so that should increase a little bit. And Research and Development probably is closer to what last quarter looked like.

Scott Reynolds - Stifel Nicolaus

Okay.

Joseph G. Mahler

On a going forward basis, so it's not big changes in there.

Scott Reynolds - Stifel Nicolaus

All right. Thanks.

Joseph G. Mahler

Yes.

Operator

Our next question comes from Walter Nasdeo of Ardour Capital. Please go ahead.

Walter Nasdeo - Ardour Capital

Thank you. Good morning.

Joseph G. Mahler

Morning, Walter.

Walter Nasdeo - Ardour Capital

If we could just touch on the capacity question one more time. So going from 35 to 50, which as I understand, 50 is your current capacity there?

Joseph G. Mahler

No our current capacity is 70.

Walter Nasdeo - Ardour Capital

70. Okay, so that's going to increase. So then after we go from 70 and above that, that's why it will be more capital intensive on the expenditures side to increase that sort of capacity. Am I correct?

Joseph G. Mahler

You are correct.

Walter Nasdeo - Ardour Capital

Okay and going from 35 to 50 is that what your expectation is over the next coming quarters or is that like next years expectation?

Joseph G. Mahler

No, that's our expectation for this fiscal year.

Walter Nasdeo - Ardour Capital

Okay. Very good. Very good. Now if I could just jump over to your hydrogen generation business, which I guess is relatively new to at least in the discussion? Could you give me some understanding of the process that's going to go on? I'm assuming it's from the internal generation and does that have any bearing on the efficiency of the system overall, from the electricity side?

Joseph G. Mahler

Sure, in terms of the electrical efficiency, there's not much of an impact because when you look at how we're actually producing that hydrogen, we reform whatever fuel we're using, whether it's biogas or natural gas within the fuel cell stack itself. We don't consume all that hydrogen on the anode side of our product so there's literally some hydrogen left over. We've been using it in the process with a catalytic reaction to preheat fuel and water.

In this process, what would we would do is working with air products that hydrogen contained in the anode gas would get separated and concentrated can be made available in a high purity stream for an industrial use or refueling so what you end up with, as you look at the total efficiency where your electricity remains relatively constant, you look at the value of the hydrogen co-production stream and the value of the waste heap, you end up with a very high efficiency of combined energy that can be used starting from the biogas or natural gas that you're using as your fuel.

Walter Nasdeo - Ardour Capital

Interesting. What's the additional cost to package that together then?

Joseph G. Mahler

We're in a demonstration phase with air products and as we work to actually make sure that the demonstration does work, what we need to do, is actually put forward, what we think the commercial vision of this looks like. It would just be a little premature right now but based on the work that we have been doing under the DOE program and the targets that have been set for the value of hydrogen that we are producing; it looks to be a pretty economical and attractive way to produce distributed hydrogen for the marketplace.

Walter Nasdeo - Ardour Capital

Interesting and then just speaking of demonstration units, anything going on with the fuel cell turbine combination that you were working on for a number of years?

Joseph G. Mahler

It's really waiting for financing for the Connecticut projects because the first megawatts class version of that is one of the projects that was approved by the Connecticut Public Utility Commission. So as soon as those get further along in being able to get finance we'll actually be doing that first megawatt scale.

We had some discussions with POSCO last week around that also because there's certainly an interest for their marketplace in having a high efficiency product. One, because there's a high fuel cost but also because it really is a utility play in the current RPS. So we may explore some other alternatives but right now our immediate path is to do it through the demonstration project in the Connecticut awards.

Walter Nasdeo - Ardour Capital

Okay, thank you very much.

Joseph G. Mahler

You're welcome.

Operator

(Operator Instructions) Our next question comes from Matthew Crews of Noble Financial. Please go ahead.

Matthew Crews - Noble Financial

Thank you. Good morning and thanks for taking my call. What was the LTSA revenue on the quarter?

Joseph G. Mahler

It was around $2 million.

Matthew Crews - Noble Financial

Okay and just to clear on a previous question, the LTSA in the backlog was around 67 million, what was expected to burn off in the next 12 months of that 67 million?

Joseph G. Mahler

We would expect, we have some units coming online so we should be able to increase that over the two million quarterly number. So it probably grows to a little over three as you go during the year.

Matthew Crews - Noble Financial

Okay and of the product services total backlog that you gave, the 154 million, what are your expectations that are shippable in fiscal 2011.

Joseph G. Mahler

Under a year for the product side of that, should be, it should be within our delivery plan so it should be nine to 12 months for that.

Matthew Crews - Noble Financial

Okay. That's good. Thank you. And then lastly just maybe some more details on the research on the smaller sized direct fuel cell. Is it dangerous to assume that might be more in the hundred to 150-kilowatts size range? Any more color there?

Joseph G. Mahler

Yes. There's not a lot more we can say right now simply because POSCO has been waiting for some public announcements for the awards that they believe they're going to get under this program. But one of the things that they went through in quite a bit of detail with us last week when they were here was they view the RPS really as an early market opportunity.

It really starts to drive volume for them but as they look longer term they really believe that the building application is one that is every bit as important in terms of the volume and the opportunity that's there because Korea, in general is moving towards some requirements both in government buildings and then eventually in commercial buildings for the use of clean and renewable energy sources.

So if you think about in highly populated areas like Korea where most people live in apartment buildings, a lot of dents, locations of office buildings, they think there's a tremendous market, particularly as places like Seoul continue to grow and need to expand their infrastructure. So we were surprised that they viewed this building application as being every bit an opportunity and every bit as big an opportunity as the RPS.

So as a result that's why they're actually going to spend their own money to fund the development of this. It's just, it's really an interesting concept. It's one that we wouldn't have discovered on our own and based on the pre-detail review they've done with us, it looks like they may have found a real winner in their marketplace that we certainly hadn't thought about.

Matthew Crews - Noble Financial

Now is that something that's applicable here in the States as well longer term?

Joseph G. Mahler

Yes. Absolutely. It's a product that we're going to design that's going to be just like all our other products. It's very standardized in terms of where it can be applied. So as we see volume coming from that Korean marketplace, as we look to other markets like the U.S., like Europe, other parts in Asia, it's a product that we can take there and address applications for building there as well.

Matthew Crews - Noble Financial

Okay, thank you very much.

Joseph G. Mahler

You're welcome.

Operator

I'm showing no further questions and I would like to turn the call back over to management for any closing remarks.

Joseph G. Mahler

We would just like to thank everybody for joining us and we look forward to updating you on our ramping plans and the additional orders we're going to be adding to backlog in our future call. Thank you very much.

Operator

Ladies and gentlemen, that does conclude today’s conference. You may now disconnect and have a wonderful day.

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