Arq Inc (ARQ) 2007 Q4 法說會逐字稿

Good morning, everyone, and welcome to the ADA-ES fourth-quarter and year-end 2007 financial results conference call. At this time, I would like to inform you that this conference call is being recorded and that all participants are currently in a listen-only mode.

This conference call contains forward-looking statements within the meaning of section 21E of the Securities Exchange Act of 1934, which provides a Safe Harbor for such statements in certain circumstances. These statements are identified by pre-factory words such as believe, will, hope, expect, anticipate, intend, and plan, negative expressions of these words or words of similar meaning.

Statements include ADA-ES's expectations regarding future revenues, expenses, and other financial measures, the number and timing of anticipated bids, projects, and new contracts for activated carbon injection systems, and other products and services; changes in DOE and utility funding for Mercury control and other projects; likelihood of additional state and more stringent federal Mercury control and carbon reduction legislation and the impact of that legislation on ADA-ES's target markets; anticipated size of and growth in ADA-ES's target markets expected shortage in activated carbon supply and ADA-ES's plans to address such shortage; cost of developing and building and projected capacity, timing, and financial impact of an activated carbon manufacturing facility; availability of financing for such a facility on reasonable terms; ability to provide a long-term supply of activated carbon and to obtain contracts to sell any activated carbon produced at the facility; our plans to secure interim supplies; treatment and source facilities for AC to supply customer needs pending the completion of this new facility; ability of ADA-ES's refined coal product to qualify for an expected dollar value of federal tax credits for that product, passage of appropriate clarifying legislation to define the parameters of such tax credits; availability of funding for carbon dioxide reduction research and development projects; ADA-ES's ability to manage internal growth as well as other similar items, such as -- such statements involve significant risks and uncertainties.

Actual events or results could differ materially from those discussed in the forward-looking statements as a result of various factors including but not limited to changing economic conditions and market demand for ADA-ES's products and services; changes in technology; availability of and demand for alternative energy sources; failure to satisfy performance guarantees; availability of adequate supplies of treatable carbon to meet interim AC demand; availability of appropriate facilities to store and treat such AC; the availability of federal funding to support certain of our research and development work; the availability of funding for procurement of the facilities necessary to store and treat carbon for interim AC supply needs; funding needed for the construction of the new AC plant on reasonable terms; our ability to secure necessary permits and other regulatory approvals; our ability to negotiate and enter into ancillary agreements needed to allow us to finance, design, and build the new AC plant; access to necessary raw materials; anticipated or unexpected changes in laws or regulations; results of demonstrations of ADA-ES's and other licensed technologies; operational difficulties; the ability to obtain necessary permits and other risks related to the development, construction, and placing into operation of an activated carbon manufacturing facility; operational difficulties; availability of skilled personnel; and other factors discussed in the ADA-ES's filings with the U.S. Securities and Exchange Commission, with particular emphasis on the risk factor disclosures contained in those filings.

Listeners are cautioned not to place undue reliance on the forward-looking statements and to carefully examine the information ADA-ES discloses publicly in its filings with the Securities and Exchange Commission or otherwise before deciding to invest in ADA-ES's securities. The forward-looking statements made during this conference call are presented as of today's date and ADA-ES disclaims any duty to update them unless otherwise required by law to do so.

Now I would like to turn the call over to Mark McKinnies, Chief Financial Officer. Please go ahead, sir.

Good morning, everyone, and thank you for joining us for the ADA-ES fourth-quarter and year-end 2007 conference call. First, I would like to discuss the Company's financial performance. Then our President (technical difficulty) After that, we will open the call for your questions. (technical difficulty)

Excuse me, Mr. McKinnies.

Yes?

I am so sorry to interrupt you. Could you please pick up your handset? The audience cannot hear you.

I am on my handset, so not on the speakerphone.

Okay, is there a way to turn your volume up?

There, it is up all the way.

Okay, that is much better.

Excuse me for not being loud enough there. I'm going to continue on. We also incurred $397,000 in net costs related to our refined coal efforts and in the joint venture with NexGen during the year. The joint venture succeeds in obtaining approval for the anticipated Section 45 credits. NexGen has the right to maintain its 50% interest by paying ADA an additional $4 million in eight quarterly payments of $500,000 each beginning when qualification for the tax credit.

On a net income basis, we broke even in the fourth quarter, compared to net income $222,000 (technical difficulty) per diluted share for the same period in 2006. For the year, our net income was $247,000, or $0.05 per diluted (technical difficulty) as compared to $377,000 or $0.07 per (technical difficulty)

Cash flow provided by operations was $882,000 for the quarter compared to $110,000 for the same period in 2006. (technical difficulty) For the year, operating cash flow amounted to $2.1 million, as compared to $1.8 million in 2006. Our balance sheet as of December 31, 2007 remained strong. Working capital of (technical difficulty) other investments in marketable securities (technical difficulty). We have no long-term debt and shareholders equity totaled over $28 million (technical difficulty). We have sufficient resources on hand to (technical difficulty) rapidly growing Mercury Emission Control market. Plans for the anticipated future needs (technical difficulty) carbon production, require additional funding that Mike will discuss with you.

In summary, the Company continues to achieve attractive revenue growth and generate net income (technical difficulty) major market (technical difficulty). We expect revenues to (technical difficulty) also been investing in our infrastructure (technical difficulty) development to strengthen our position as a market leader by Mercury Emission Control System; (technical difficulty) plan to supply activated carbon. We are also addressing opportunity (technical difficulty) enhancement of products such as (technical difficulty) enthusiastic about reporting our major milestones in AC (technical difficulty) and revenue growth and profitability in 2008.

Now I would like to turn the call to Mike.

Thank you, Mark. 2007 was a very exciting year for the Company as we achieved near-term growth as reflected by our 24% increase in revenues for the year and made significant progress on our long-term growth strategy of supplying activated carbon to our customers in the power industry. I'd like to bring you up-to-date on the current status of our aggressive business strategy and provide you with milestones to look for over the next several months that will reflect our increasing success of our business plan.

Some investors have expressed concern that the coal-fired power industry has been under increased scrutiny over environmental issues this past year, especially related to the impact of carbon dioxide emissions on climate change, resulting in the rejection of a number of permits for new coal-fired plants. However, we expect that this adversarial climate to increase the market for ADA's products and services.

Let me explain. Our business plan is based upon providing technologies for the existing 1100 fleet of coal-fired boilers that produce 325 gigawatts of electricity, roughly 50% of the U.S. demand. The best estimates of the energy experts indicate a need of an additional 300 to 500 gigawatts of new capacity in the next 25 to 30 years.

With new portfolio standards for increased use of renewable energy sources and requirements for reduction of greenhouse gases limiting new coal-fired plants, dependence on the existing fleet for baseline power increases. To continue operating even as environmental regulations become more stringent, these older plants will require the use of retrofit technologies to address conventional pollutants such as SOx, NOx, and particulates, and for the first time, pollutants such as Mercury and carbon dioxide. Therefore, the current trend towards cleaner energy creates a growing market for ADA's existing and developing innovative technologies.

I will now move onto the regulatory market drivers that create demand for our mercury control equipment, chemicals, and services. The regulatory issues surrounding mercury control have created confusion for the investment community because of the complicated patch quilt of state regulations, separate rules for new plants, and the constant flux of the federal regulation. Although a straightforward or federal regulation-driven market may make the investment decision more clear, the complexity of the current requirements has actually been a strategic advantage for ADA.

Unlike other suppliers of activated carbon and mercury control technology, ADA has been extensively involved in the policy process at the state and national level for the past eight years and we have intimate connections with the coal-fired power customers gained through 30 years of serving this market. This insight and knowledge has allowed us to accurately predict that this market with going to develop and make early decisions to position the Company to take advantage of these events.

A good example of this is a recent ruling by the D.C. Circuit Court that EPA erred in its process that resulted in the relatively lenient Clean Air Mercury Rule or CAMR. The court's ruling invalidates CAMR and remands the matter back to EPA for further proceedings. CAMR, which was promulgated in the spring of 2005, created very little market for activated injection technology.

However, we predicted that CAMR would not stand up to judicial review and continued with plans to respond to the current mercury market from state regulations and consent decrees, and a larger market that is likely to be created by strict federal mercury control rule, which we believe will be enacted in the next year or two. These plans involve constructing a new large-scale AC production facility to be operational in early 2010.

In addition to this first production line, we're permitting five identical lines at three sites in Louisiana and North Dakota. Each production line is designed to produce up to 175 million pounds of AC per year, for a total annual production capacity from all six lines in excess of 1 billion pounds per year. This capacity would help meet the expected needs of most coal-fired power plants that could result from a stricter federal mercury rule control regulation.

With this Circuit Court ruling, it appears that our expansion plans are now more likely to pay off for both the Company and our customers. So the long-term viability of mercury control looks even more promising with the court's ruling, but what impact will this have on the near-term markets for equipment in AC? The supply of commercial systems for activated carbon injection is our fastest-growing area and was our dominant revenue source in 2007. We expect that this will also be true in 2008 based upon bid and proposal activity. For example, in the fourth quarter 2007 alone, ADA responded to 19 requests from customers for ACI system quotes.

Most of a near-term market for ACI equipment is based on existing regulations in a dozen states and strict limitations on new power plants. These roles remain in force and will not be impacted by vacating the federal rule. However in spite of this we are seeing some delays in the decision-making process on mercury control as a result the ruling.

The general consensus from customers is they believe a new federal rule will obviously be stricter and require additional equipment and AC. For example, CAMR required less than 20% reduction in some cases and utilities could avoid doing anything by buying credits, whereas the new rule is expect to require up to 90% reduction with no trading allowed.

This has created a need for them to assess the impact across their entire fleet. As a result, some contracts that were expected to be awarded in February have been postponed and we have been asked to extend the period for our bids to be valid. We should have a better feel for the impact of this on the timing in new contract for equipment after the 45-day review period by the Department of Justice.

The majority of the near-term market for activated carbon is also based on firm regulations that are already in place and not impacted by the CAMR ruling. In fact, if we looked at the AC market just for the 80 ACI contracts that have currently been -- that have already been awarded and these equipment are being fabricated and installed -- we estimate that they will require over 200 million pounds of AC per year and as much as 150 million pounds of AC to be delivered in 2009. Since this early demand occurs prior to the planned startup of our first production line, we have developed an interim supply plan to sell into this market.

In January, we announced our plan for reducing near-term supply of high-quality AC by producing -- by purchasing raw activated carbon material from foreign producers and then milling, chemically trading, packaging, and delivering a high-quality product to utility customers. To accomplish this, we relied heavily on the expertise and experience of two recent additions to the company, John Rectenwald and Steve Young, who have a combined 60 years of senior level experience in the production of the AC.

As a result of this effort, we produced our first batches of the AC in January and in February completed the first performance test of the product a power plant burning Western PRB coal. By injecting ADA's AC at a very competitive feed rate, we are able to reduce mercury emissions by greater than 90%. The Western coal application for this first test was chosen because a majority of the early market for mercury control is for plants that burn Western coals. To control mercury for these plants, it is necessary to use the higher priced chemically treated AC.

This was an important milestone for the Company because we now have our own product to sell to customers. Our interim supply plan creates greater potential for AC revenues in 2008 and 2009 and would enable us to compete for contracts that require AC supply prior to the 2010 startup of our planned new production line. We intend to put together facilities and sourcing contracts so that by the end of 2008 we can supply up to 10 million pounds per year and increase the capacity to 30 million to 50 million pounds per year by the end of 2009.

We're evaluating different options to purchase or lease facilities to process the AC with capital expenditures expected to be less than $2 million. Due to the high cost of foreign carbons and transportation experiences, this business section is expected to operate at approximately 20% growth margins. Once the new plant becomes operational, we expect the margins for our AC will increase to 60% or higher.

In addition to progress on the interim supply, we have been making great strides toward the design, permitting, and financing of a new AC production facility. Early raises of capital in 2004 and 2005 provided ADA the resources to move forward at an accelerated pace to be able to lay the groundwork for commencing production synchronized with the growth this market.

In August we announced the filing of an air permit application with the Louisiana Department of Environmental Quality to build what would be the world's largest AC production facility. In September, we filed an air permit application for a similar facility with the North Dakota Department of Health. We plan to file a third permit for another similar facility North Dakota in the near future.

The permits could only be filed following a two-year effort to identify potential sites, test various feedstock materials, reserve lignite sources, secure property for the plants, design the plants, and perform engineering environmental assessments. These permits, which have required to begin construction of the new plant, each cover two production lines capable of producing upwards of 350 million pounds of AC per year. That is per site.

Our draft plan was released by -- our draft permit was released by the Louisiana DEQ in early December and was opened for a 45-day public comment period. The DEQ received comments related to the specifics of the air pollution control equipment selected for the product. We have been informed by DEQ that DEQ addressed these issues and is submitting the permit with no changes to EPA for their approval. If there are no additional comments from the EPA, we expect that final permit to be issued in the first half of 2008.

To keep an aggressive schedule to bring new production online in a timely manner that coincides with the expanding mercury control market, we have engaged an engineering procurement construction company to continue the plant designed process and addressed critical path issues. We are also in the process of purchasing long leadtime equipment for the plant.

The Company is also making progress on securing the financing that will be necessary to complete the project. In this regard, in August we engaged Credit Suisse as our financial adviser for the project. The estimated all-in project cost for the first production line is expected to be approximately $300 million. We are currently planning to secure 60% of the financing or $180 million through debt. We are working to secure the senior project debt with off-take contracts for the AC that we will be providing through both the interim supply and new production.

The process of selling pre-production capacity is a conmen procedure in the power and coal markets. To secure the project debt, we will need to put in place long-term off-take contracts for AC that will have a total contract value of approximately $250 million. We expect to accomplish this with two or three contracts. The nature of the contracts must cover the time period of the debt and be in a secured take-or-pay form that is bankable.

To insure the contracts meet these needs for project financing, we are negotiating contract terms that are expected to provide revenues through at least 2016, with some bids going out to 2021. We are coordinating the development of the terms of the contracts with Credit Suisse, who are placing the debt for the project.

In addition to the debt financing, we anticipate sourcing 40% of funding or $120 million through equity. Our financing plan is based on splitting this into $60 million at the ADA corporate level and $60 million at the project level. For the corporate equity, we have will have to supplement our developmental expenditures to date and the $14 million in working capital we have on our balance sheet from previous financing and ongoing cash flows for our business.

We intend to raise the supplemental corporate equity through the sale of up to 3 million shares of ADA-ES common stock that was approved by shareholders last year. Although this may result in a substantial dilution of our stock, it will help fund a capital project that we expect to increase our revenues by greater than 500% in less than two years.

The second $60 million of equity is expected to be raised through an investment by a strategic partner at the project level. In January, we announced that we had completed the first phase of the selection process for a strategic equity partner and had received indicative bids from a number of substantial financial and strategic firms with significant experience in the energy sector. All of these strategic equity candidates are well capitalized and have significant plant operation experience and demonstrated success at developing large projects.

We have narrowed the group of interested candidates, begun negotiating final terms on a definitive participation agreement that we are working toward signing in April. We believe the strategic partner will provide us the additional equity financing we need, expertise on developing projects of this magnitude, and access to the resources to move forward not only on the first production line but potentially all six production lines that we are permitting.

As we progress over the next few months on financing this project, we will keep the public informed through press releases of significant milestones. Because of the magnitude of these events, they will be material to ADA and will be made public once the contracts and definitive agreements are finalized and signed.

Therefore as an investor you should look for the following key announcements -- off-take contracts from utilities for AC; identification of a strategic partner and details of their equity investment; release of the final permit for the first production line; and key equipment purchase commitments. These announcements will document the accomplishments of steps needed to secure the debt financing and begin construction.

Changing topics, let me update you on the status of our other near-term growth opportunity, which involves producing a refined coal product. Our JV with NexGen Resources, Clean Coal Solutions, intends to produce a product that we expect to qualify for the IRS section 45 tax credits, processing coal to reduce emissions of nitrogen oxides of mercury.

Last year, we conducted two additional full-scale tests of our product, which we called Cyclean, which demonstrated the ability to meet the emission control performance required to qualify for these tax credits. Cyclean is based on ADA-ES's patented chemical developed for laggings boilers burning western coals, combined with our expertise in sorbent-based mercury control technology.

One key challenge for this business is the need to obtain legislative clarification of the current tax credit requirement for 50% increase in "market value" of the refined coal. Because market value is -- for coal is not a well-defined concept, this provision makes it difficult for both the technology supplier and the IRS to determine how to interpret and enforce this rule.

We have made good progress working with Congress and the correction we needed to address this problem was included in the final market of the Senate energy bill. However, the Senate was unable to get the required 60 votes and the tax title was dropped from the energy bill passed last fall.

We are still working to get this correction in the energy tax bill that Congress worked on this year, driven by the need for extension of the tax credits for renewable energy. Without this correction and if PRB coal prices continue to rise, this business line will be limited to the profits based on just the chemical sales and no tax credit.

In addition to our other key areas -- to our key growth areas, mercury control and refined coal -- we continue to demonstrate our position as a premier developer of innovative clean coal -- clean energy technologies. Control of carbon dioxide from coal-fired power plants is currently a hot topic in Washington and a significant issue for the coal industry. ADA sees this as an opportunity and we have begun working in this area to develop technologies to help our customers with this issue.

Our approach to developing CO2 capture technologies is built around business model developed the mercury control market. We're designing technology for existing plants rather than just new ones, and we're pursuing technologies built around key expandable chemical that could produce a long-term revenue stream for ADA-ES.

Since the current market for CO2 is some years in the future, although Washington appears ready to accelerate the schedule, we intend to primarily use external funding from DOE and utilities to support R&D activities in this premarket period. To date, we've already been successful at obtaining additional funding from DOE and the utility for testing and scale-up of sorbent-based CO2 capture.

We are currently in the process of developing R&D funding proposals for multi-million dollar projects. We are also pursuing additional areas around carbon management for coal-fired plants with the intention of providing multiple technologies to address the need for our customers through reduction of carbon generation, carbon capture, and beneficial use of the carbon.

In summary, we continue to advance our business strategy to provide environmental technologies and specialty chemicals to the power industry. We are very enthusiastic about our rapidly growing commercial market for mercury control technology. We are implementing significant enhancement and adding resources and depth as we shift our mercury control business from research/development demonstration to supplying commercial equipment and furthering plans to manufacturing key chemicals.

These changes reflect our response to realization of the mercury control market and should allow us to benefit from the extensive efforts that we have made over the past five years to help create this market. We can now shift the efforts of our effective R&D team to developing new technologies, processes, and commercial business concepts to address the huge opportunity that awaits us in climate change and carbon management.

We are confident in our position and firmly believe that our aggressive strategy will take ADA-ES to a new level. I would now like to open up the call to questions.

(OPERATOR INSTRUCTIONS) Sanjay Shrestha, Lazard Capital Management.

It's Graham Mattison. Just a quick question. I apologize, I couldn't hear at the beginning of the call. You know, you were mentioning something about the margin trends in the mercury control division. It was down from the prior quarters. Is this a reflection of increasing competition or is this more of a normalized level now that the market has moved more into commercial sales and away from demonstration units?

It is really a matter of two factors. One is the increased amount of those revenues that are coming from ACI system sales. Those system sales carry lower margins than the mix of revenues that have been in that segment before, been primarily dominated by the DOE and industry contract revenues, which had higher revenues.

So as the ACI systems continue to grow, representing a larger part of that segment's profits, we will see that margins continue to decrease there. Too, our expectation on those ACI systems sales is to have gross margins in the 20 to 25% range. We believe those are at competitive amounts.

All right, great. Thank you. Just looking out -- now that the CAMR has been thrown out, what are you seeing or hearing on the policy front and your expectations? Do you think you'll see more movement on the state level or would it be -- was everyone waiting for a federal ruling before moving on the state level?

Well, it really depends on what happens here. The process is the Department of Justice has 45 days, which I think ends in the middle of March, in which to more or less provide EPA with guidance on what the rule means. So then it is a matter of what EPA decides to do and whether they do something in the late hours of this administration or leave it to the next administration to do will determine whether the states move forward.

So in some cases there's -- it is kind of -- there's state actions that will kick in automatically. For example, in Wisconsin there was a rule that was more aggressive, but they had a provision that if the federal rule was weaker, they would fall back to the weaker rule. So now they could be back to a more strict rule. But I think what we're seeing right now just beyond the 12 states that are there, the rules for existing power plants, everybody else just wants to see what comes out of EPA in the next month or so.

All right, then given that, with some of the uncertainty, is it reasonable to think that you would probably see about the same amount of awards in 2008 as 2007?

You know, we think so. Again, most of these are for rules that are already in place, so it is really more of a timing issue. Some that we expected were -- should have been awarded in February that we have been asked to extend the bid for another 30 to 60 days, so it will just push it out a couple of months.

Great, but it is still the long-term -- the long-term market is definitely --?

Absolutely.

Okay, great. I will jump back in queue. Thanks very much.

Jason Simon, JMP Securities.

Mike, just a follow-up to the last question. With respect to the 45 day review period, just to get some clarification on when I guess you would expect some anecdotal evidence on which way the EPA would move. Understandable they have a decision to make a on their own, but maybe you could give us some clarity as to what the Carper bill is all about and whether or not that would actually force a decision by, say, October.

Jason, that kind of talks about the two parallel paths in which legislation could come. And that is either through EPA or by -- through legislation. One of the issues that EPA has to face is the way the ruling read, it forced it back into a section that will require MACT regulation. The MACT regulation is a pretty onerous restriction because it doesn't allow any flexibility in how it is applied.

So in the past, both the environmentalists and the industry recognized that the answer might be in a little more flexible rule. So that kind of encourages everybody to try to work through legislation. So what you're seeing in Congress is two different directions and actually both coming around Senator Carper, who is on the Environment and Public Works Committee.

He has got a 90% rule that they were trying to attach to the Warner-Lieberman CO2 bill, and it was taken out in committee with the thought that maybe it will be added once that bill goes to the full Senate floor. In parallel, Senator Carper has also put out an introduced bill to force EPA to come up with a 90% rule by October, so just more or less to force them. I don't know how much progress that is moving forward, but in general there's a number of different directions of which a strict mercury rule could come out.

We do not know what has come through legislation, whether it comes through EPA, and whether it will happen in this administration or the next. So we'll just have to wait and see on that. The way we kind of look at that is that is a matter of when we look to turn on that second through the sixth line, production line, and time those capital expenditures for the that market, where the first production line is pretty much based on been rules that are already in place.

Okay, and with respect to I guess your estimate on what the market should look like in 2010, which is I guess what you had suggested is over 200 million pounds, could you perhaps just go through what states those would be, what consent decrees, and I guess what your expectations would be for -- when you would think you would be able to secure some off-take contracts for your debt financing?

Well, that 200 million pounds was really just a number for the first 80 contracts for ACI equipment. When we look -- we expect another 70 or so to be sold just based on state rules in the next year and a half, so we really look at that 2010 market as still being around that 300 million pound to 400 million pound range.

We are also seeing some additional market. We're starting to see our first Canadian RFPs out for carbon. Their needs are late 2010. So instead of this market shrinking, we're seeing a number of things. EPA recently announced that they are looking at requiring the 100 cement plants -- which are very large facilities, going to need significant amount of carbon -- possibly coming out with a regulation September for those.

So all the dynamics are this is a very firm market. It is only going to grow. So what we're seeing on these off-take contracts is really we are running several parallel activities that we all expect to come together in time to finance this plant and get it started. In early summer, break ground, so we're looking to have the permits come in in time for that, the strategic partner coming in time on that, the off-take contracts to support the debt all within that timeframe. That is what we're hoping it all comes together. And if that happens, then we are going to be producing in early 2010.

Okay, then why the variability in I guess the number that's being around with respect to what the potential size of the market looks like in '10? Some people are saying a couple hundred million. Obviously with the number of units that you think have the potential to be installed, another 70 you are saying, it can be 300 million to 400 million units. What is the variability do you believe in what people's assumptions are?

Well, on some of that are state rules, and so in a lot of the state rules there are options of burning a high sulfur coal and if they are going to scrub those units and put SCRs, we don't look at that as much of a market. So it really depends on some uncertainties on exactly what the utility is going to do, what rules will specifically be in place, what kind of performance they are getting.

We are estimating on the low end of things, so we're very comfortable of the range of this, of being in the above 300 million pounds. We can go through and look at what the utilities are bidding, asking for at that. It kind of works out that. So we don't see that as having a lot of uncertainty. It sounds like a lot, 300 million to 400 million, but it is just part of how they place orders. That is the reality.

Okay, I guess the last question just some verification. You had suggested that the market in 2009 would be over 150 million pounds. Is that what I heard correctly?

Yes, we think when we look at what rules are in place, the number of new plants that are coming online between now and then, say, the Illinois rule that requires plants to be injecting activated carbon by the middle of 2009, when we add those up on a plant-by-plant basis, it comes to that 150 million pounds.

Okay, good stuff. Sorry, a follow-up. What do see coming out of Texas right now with respect to consent decrees and I guess timing on activated carbon used down there?

That is going to depend upon some utility decisions that they are looking at addressing once they get little more clarity in the next few weeks.

Okay, thanks very much.

Brian Shore, Avondale Partners.

Just a quick question initially about your near-term sourcing efforts. Can you talk a little bit about the availability of carbon coming from China, impacts from coal shortages over there as well as your competitors, Calgon, already sourcing a good deal of carbon from there? What is the availability looking like?

Well, the numbers that we are trying to put together, 10 million by the end of this year and 30 million to 50 million by the end of next year, is a challenge, because it is not really available. It is a whole bunch of relatively small suppliers. There is pressure on coal, as you see feeding China's needs for power and steel.

Those are obviously a much bigger priority than activated carbon, and also we have some pretty specific requirements for the quality of that carbon. That dictates a quality of the coal. So what we're doing, we are coordinating with production in China. We're got people heading over to China very soon to -- so we can look at the facilities, look the coal characteristics, make sure it can meet our quality needs. So it is going to be a challenge to get that much supply, especially be able to provide 30 million to 50 million pounds by the end of 2009.

All right, then sort of getting back to the recently remanded CAMR, I guess, I think you said in your prepared comments that you've seen some systems have pushed back as people look to see some clarity there. Are you also seeing in your talks for supply agreements of activated carbon? Are you seeing some delays and some hesitation there on the parts of utilities to see what a federal rule looks like?

It is less delays and hesitation than it is that when -- every time you have uncertainty come into an industry that they have kind of all gone through a process of looking and, okay, these are the rules. Here's CAMR. Here's the state rules. Let's lay out a plan. The plan involves buying this many systems, this many -- this much activated carbon.

And all of a sudden, now the rules change. So rather than continue on that, it is kind of -- let's call a timeout here. Let's look at what the new rule might be. Does it make sense, what we're doing? If we're going to need to get a higher level of removal, if we're going to get to need more mercury, what should we be doing? So it is more the uncertainty of it and just wanting to take a timeout for this DOJ review and to see what EPA says on the other end of this.

Sure, and is that, the timeout, is that being taken by states -- or by utilities in states with regulations already or is that more--?

No, it's kind of -- there's two parts to it. So in some cases if they have a state regulation, then they know what they have to do in that state, unless it's very weak state regulation that they think now the EPA rule could be even stronger. So Wisconsin might be an example of that. So it's more or less they just want to make sure that whatever they are going to purchase fits into a plan that now meets the new scenario.

Now one question. Calgon announced last week that they had secured a contract with the utility and I think this was the first publicly announced deal to date. I know you guys had worked with them in the past. Is this one that you were involved with in the bidding process?

This was submitted under our joint agreement with Calgon.

So is there -- can you shed any insight there on what sort of impact that may have in terms of revenues?

Well, what we had announced in the past, our relationship was a commission-based structure at that time. We are getting confirmation on exactly where we stand on that. But we will be giving further guidance on that, but it would be based on future sales and the timing of those revenues.

Okay, great. Thank you, guys, very much for your color.

Bill Burns, Johnson Rice.

You mentioned having a definitive agreement with a strategic partner signed next month and then when you listed your key items to watch out for, you listed having the off-take contract first. Do you think having that contract in place is going to have to come first?

There are two parallel efforts. Obviously the strategic partner wants to see that this is going to be a financeable plan and a utility that is looking at signing up an off-take contract wants to make sure we have the financial resources to build a plant. So all of the --

It has to all kind of come together at once, yes?

Yes, well, everybody is under confidentiality agreements, so both parties are aware of the progress on the other sides of these transactions.

Than a follow-up on your cement. I have seen an awful lot of news come across my desk about mercury emissions at factories. Do you have any working relationships with any companies?

We have done some work in the past with the Portland Cement Association, but this will -- most of the marketing to the individual plants will end up being new customers for us if that happened. The good news is like the power industry that there's not thousands and thousands of potential customers here.

If you look at it, it is 100 cement plants and there's a lot of consolidation in the industry. Maybe that is 10 potential corporate entities we would have to deal with. But we would be starting with us a little bit of a reputation there, but not near the inroads we have in the coal-fired power industry.

But would it be correct to say, though, or imply that they could actually make a decision a little bit quicker than, say, a utility company?

They are both are not known for rapid decision-making.

Thanks, guys.

[Louis Brower], private investor.

Can you clarify this section 45 thing more than you did in your notes?

Well, it's this issue of -- in the requirement it was written very specifically that the contract has to show an increase in the market value of 50%, an increase of 50% on the market value. Nobody in the coal industry knows what the concept market value means. So it needs some clarification. It will have to be done either at the IRS level. It is better to be done to go back to the people who wrote the legislation to clarify that.

So what we have -- the correction that we have gotten approval from the Senate side on that was that rather than talk about market value, it was to say that the market value provision will be deemed to have been met if you have even greater increases in emissions than the 20% was required. So it set a higher level. I think it was 20% for NOx and 60% for mercury.

If you achieved that, that would be considered meeting that market value test. So that is the kind of correction we're hoping for without -- and only Congress can change the rules that drastically. Otherwise the IRS is going to have to try to figure out what that means.

Another question. You say you have people on the way to China to start working. Was that --?

Relative to the sourcing that we're doing for the material that will be processing in the U.S., yes.

Okay, thanks.

[Mark Segal], Canaccord Adams.

Most of my questions have been answered. Just one quick question for you. Going back to the industry dynamics that you cited, the difficulty in securing interim supply of activated carbon, what is your confidence level in hitting that 10 million pound threshold for this year and 30 million to 50 million next year? And what would the timeframe look like? When do you need to start to I guess get a sense of the security of those agreements to meet any commitments in 2008?

Well, it's -- we are in the process of putting that together as we speak. The fact that we have already been able to secure some, produce and process it and test it, shows you how quickly we're moving. But let me clarify. The 10 million pound capacity is how much we will be able to produce an annual basis by the end of the year, so we're not saying that we're going to scale up to have 10 million -- revenue from 10 billion pounds this year.

Our plan is to put the those facilities in place that by the third quarter we're selling products and hope to have the capacity that that product is available at a 10 million pound per year. So in other words, less than 1 million pounds per month capacity. Then through 2009, ramping that up from the 10 million to the 30 million to the 50 million, so by the end of the year we have a capability of providing up to 30 million to 50 million pounds, or, say, 3 million to 4 million pounds per month at that time. But again, not selling 30 million to 50 million pounds in that year.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS) [Chuck Nichol], private investor.

I wanted to follow up just a little bit. In the past you've talked on Clean Call about the IRS letter ruling or whatever and it almost sounded like until your last comment that that was not one of the options left. It sounded like if the Congress doesn't act, you had no chance of getting those tax credits. Is the letter ruling still a possibility?

It is still a possibility. While it was going through Congress, the IRS said they were not going to address it. We are seeing some change from the IRS, private letter rulings from the earlier Section 29 experience were problematic. They felt like they were -- the IRS looked bad by giving out those private letter rulings. Now they are backtracking a little bit that they feel that they might do that if we don't get the clarification from Congress. So it is possible. It's just some uncertainty there. But the window is open for those.

Okay, thank you.

[Regina Johnson], [Glatz].

I was calling to find out if the EPA ozone ruling that EPA will be putting down maybe sometime today, will that have any effect on your business?

That is primarily going to be a SOx and NOx issue. We do a little bit around NOx, but our big revenue source is really around right now mercury and CO2 in the future. So that won't have much impact on us.

Okay. Thanks.

There are no further questions at this time. I will now turn the conference back to management.

Well, again, thank you for your interest in the Company. We have got a pretty aggressive schedule. There's going to be some milestones that are going to be happening over the next several months that we -- if completed will show the progress we're making towards getting this -- the financing for this and construction for this, and this is going to be a major event for the Company.

So we will keep you informed as these contracts get completed and they are signed and we will announce and file these. So, again, thanks for your interest and keep an eye on the Company over the next several months.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.