Arq Inc (ARQ) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the ADA-ES first-quarter 2008 financial results conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are currently in a listen-only mood.

This conference call contains forward-looking statements within the meaning of Section 21-E of the Securities Exchange Act of 1934 which provides a Safe Harbor for such statements in certain circumstances. These statements are identified by prefatory words such as belief, will, hope, expect, anticipate, intend and plan, the negative expressions of these words or words of similar meaning. Actual events or results could differ materially from those discussed in the forward-looking statements as a result of various factors, including factors discussed in ADA-ES filings with the US 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 Securities. The forward-looking statements made during this conference call are representative 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.

Thank you, Ashley. Good morning, everyone, and thank you for joining us for the ADA-ES first-quarter 2008 conference call.

First, I would like to discuss the Company's financial performance. Then our President, Mike Durham, will update you on the Company's recent corporate developments. After that, we will open the call for your questions.

As discussed in today's news release, there are two matters that had a noteworthy impact on our revenues and results for the first quarter. The first is the trend of reduced revenues from the Department of Energy, DOE, and industry-supported Mercury programs that we've been reporting for some time. We expect funding for Mercury-related projects to continue to decline. However, we expect increased funding for CO2 technology from government and industry-supported contracts to begin to replace that source of revenue beginning in late 2008.

The second matter that affected our results is the remand of the Clean Air Mercury Rule, or CAMR, by the DC District Court of Appeals in February and EPA's subsequent announcement that it will appeal that decision. Mike will discuss our future expectations and the effects of this on the broader market, but the impact on our mercury emission control, or MEC, revenues and ACI system sales in the first quarter as compared to our earlier internal projections was significant. Although we achieved modest revenue growth in the quarter, we reported a net loss of $168,000 as compared to a net loss of only $23,000 in the 2007 quarter on slightly increased revenues of approximately $4 million. Unless we see a change in the orders we now expect, we're projecting that our 2008 revenues will be essentially the same as last year.

We had contracts in progress at quarter end for supply of ACI systems with remaining revenue totaling approximately $10.4 million, which we expect to complete and realize in 2008 through 2010. We expect to realize approximately $5.3 million of that amount in 2008. The timing of revenue recognition from our new contracts usually occurs in the 12 to 16-month period, or even somewhat longer for new power plants, after an award and is based on the percentage of completion method.

Revenues from our DOE and industry-supported demonstration contracts during the quarter continued generally at the reduced pace expected and contributed $1.4 million to revenues for the quarter, a decrease of 5% from the 2007 level. The remaining unearned amount of these contracts was $4.2 million as of March 31, 2008, of which we expect to recognize $2.2 million in 2008, which amount includes cash contributions by other industry partners.

Consulting revenues decreased $273,000 in the quarter, also associated with reduced activities related to DOE and industry programs. FGC and other revenues decreased by $172,000 in the quarter as compared to the same period in 2007. The decrease is a result of lower shipments of chemicals to continuing customers.

Our gross margin in the first quarter was 33%, as compared to 41% last year, due to decreased margins in both our MEC and FGC segments, and in particular due to the trend in our MEC revenue mix towards the ACI system sales and away from the higher-margin DOE contracts.

For the near-term, we expect the sale of ACI systems to continue to represent an increasing source of revenues for which the anticipated gross margins are lower than for our contract R&D work and specialty chemical sales. As a result, we expect the gross margin for fiscal 2008 to be slightly lower than the 31% margin realized in 2007.

In the long-term, however, we expect our margins to increase if we are able to begin supplying material amounts of activated carbon from our planned AC manufacturing facility. During the first quarter, we continued our investment in development activities aimed at production of activated carbon for the rapidly expanding mercury control market through the expenditure of an additional $4 million in project costs.

Cash flow used by operations was $866,000 for the quarter as compared to a use of $259,000 in the first quarter of 2007.

Our balance sheet as of March 31, 2008 remains strong with working capital of $10 million and other investment in securities of $2.8 million. We had no long-term debt, and shareholders equity totaled over $28 million at quarter end.

We have sufficient resources on-hand to continue the pursuit of the growing mercury emissions control market, although completion of our activated carbon developed project will require participation of a strategic partner, outside debt financing, and additional funding at the ADA corporate level. I am excited to report that we are now well into the midst of steps required to secure the equity and debt financing for the ongoing development of our greenfield activated carbon plant that Mike will discuss further.

Mike?

Thank you, Mark. I would like to bring you up-to-date on the current status of the three growth areas of the Company -- mercury control, refined coal, and greenhouse gases.

Let me start with mercury control, which involves an aggressive business strategy to continue to be the market leader in the sales of engineering services, equipment and activated carbon to reduce mercury emissions from coal-fired power plants in North America. I will discuss the recent changes in the regulatory market drivers from mercury control and the progress we've made in the past four months towards a plan to create infrastructure to supply AC to this market.

The EPA and the Utility [Air] Regulatory Group, or [UR], are appealing the February remand of CAMR. Although we expect the appeal to be turned down, an appeal to a higher court is likely, which would delay a potential EPA federal rule.

Many shareholders have asked me why the power companies are legally challenging mercury regulations when ACI now proven to be commercially viable control technology that is available at relatively low-cost. The answer is that the recent interpretation of the Clean Air Act by the DC court would lead to not just a mercury rule but additional rules on up to 188 different hazardous air pollutants, including arsenic, lead, Selenium and other metals.

Since the potential impact goes far beyond mercury, we expect continued legal action associated with any EPA mercury rule. As a result, many believe that the most likely scenario for a federal mercury rule will come from legislation.

While it's possible that Senator Carper's 90% Mercury Control Bill could be attached to the Warner-Lieberman CO2 Bill when it goes to the full Senate this summer, it's more likely that a federal mercury control bill will be left to the next Congress in 2009.

While federal regulations remain uncertain, the market remains strong in the 13 states that have passed their own mercury control regulations and for new power plants. In addition, we are seeing new markets emerging for power plants in Canada, and regulation is being considered to reduce mercury emissions from cement plants.

Probably the best indicator of the impacts of the regulatory framework on our business are the market activities and the sales of activated carbon injection, or ACI, equipment. As Mark mentioned, our ACI revenues in the first quarter did not meet our earlier expectations. This was due to the postponement of at least 12 ACI systems due to the uncertainty created by the CAMR ruling.

We see the remand of the relatively lenient CAMR as a positive longer-term development, as it will almost certainly enable the overall market opportunity to be maximized under stricter federal regulation, even though it's negatively impacted the near-term market.

However, despite this uncertainty, there were significant bid and proposal activity for ACI systems during the period. In the first quarter, we responded to requests for quotations for 30 ACI systems, 19 of which are to meet existing state mercury control regulations, 7 for Canadian utilities and 4 for new U.S. power plants.

Following ACI systems sales, the next phase of the growth in the mercury control business will occur in 2009 and 2010 when the 80-plus ACI systems sold by suppliers to date as well as new systems being ordered will all require activated carbon on a continuous basis. We are preparing to serve this market through our interim AC supply plans and our new AC production facility that is in progress. With the remand of CAMR, it appears that our expansive plans are now even more likely to pay off for both our company and our customers.

With respect to our interim AC supply plans, we recently achieved 90% mercury capture at a full-scale power plant using our treated ACI -- activated carbon produced from a facility we recently acquired. This was an important milestone for us because we now have our own products to sell customers. Our interim supply plan creates greater opportunity for AC sales revenues in 2008/2009 and will enable us to compete for contracts that require AC prior to the planned 2010 start-up of our new production line.

As to our new facility, we announced last August the filing of an Air Permit Application with the Louisiana Department of Environmental Quality; last September filed an Air Permit Application for a similar facility with the North Dakota Department of Health. Our draft permit was released by the Louisiana DEQ in early December and in April, after reviewing comments submitted during the public review period, DEQ submitted the permit to EPA for their approval. We expect our final permit to be issued for the Louisiana facility this month.

We are also making progress on securing the financing that will be necessary to complete the project. The estimated all-in project costs for the first production line has been estimated to be approximately $300 million. The EPC contractor we have selected for the project is currently in the process of confirming previous costs and scheduling, which is especially important in this time of rapidly increasing costs.

We are currently planning to secure 60% of the financing, or what we expect to be $180 million, through debt financing. We are working to secure the senior project debt with offtake contracts for the AC that we will be providing through both our interim supply and new production from the new plant. This will require that we put in place long-term offtake contracts for AC that will have a total contract value of approximately $250 million. We expect to accomplish this with two or three contracts.

In this morning's earnings release, we announced that we have received notice from a major utility that ADA has been selected for award of a long-term contract to supply AC with an estimated contract value of $35 million. The contract calls for ADA to deliver AC for five years beginning upon notice from the utility, which is expected in the third quarter of 2009. We will be releasing additional information on this contract later this week following receipt of final customers' signatures on the negotiated agreement. The contract terms reflect the type of long-term take-or-pay commitment that is necessary to support debt financing for the new production facility.

In addition to the debt financing, we anticipate sourcing 40% of the funding or at present $120 million through equity participation. Part of this equity will come from our capital investments in the project to date and the $10 million in working capital we have in our balance sheet from previous financing and ongoing cash flows from our business.

We expect the remaining project requirement of $100 million to come from an investment at both the ADA corporate level and the project level by a strategic partner. We started the selection process for a strategic partner last year. In January, we announced we had received indicative bid letters from a number of substantial financial and strategic firms with significant experience in the energy sector. In March, we made a final selection of a partner that we believe will provide us not only the necessary equity we need for the first plant but also the expertise on developing projects of this magnitude and access to resources to move forward on up to five additional production lines as the market develops.

We've agreed to general terms with this partner for an investment of approximately $40 million at the ADA corporate level, for $3 million convertible preferred shares. A second investment of approximately $60 million is expected at the project level for 50% ownership of the activated carbon production business opportunity.

We expected that we would be able to announce the name of the partner in April after completing and signing the necessary legal documents. However, the terms of a project of this magnitude, which includes not only the immediate product but options for up to five additional production facilities, are quite complex and are still in negotiation. Consequently, we've placed additional time burdens on the legal staff of both companies as we have simultaneously been working together to negotiate other important agreements with third parties for coal supply, construction and offtake contracts for AC. We're making significant progress on this aggressive program although we have curtailed non-essential spending on the project until we are able to finalize key agreements and relationships. We will keep the shareholders up-to-date with additional details as these contracts are finalized.

Changing topics, let me update you on the status of our second near term growth opportunity, which involved producing refining coal product. We are continuing our work to obtain legislative clarification on the tax credit requirements of a 50% increase in the market value of refined coal. We are aiming to get this correction in an energy tax bill that Congress will work on this year, driven by the need for extensions of the tax credits for renewable energies. Without this correction [PRB] coal prices continue to rise, this business line will be limited to the profits based upon just chemical sales and no tax credits.

Now, let me address our third growth area, which involves the control of carbon dioxide from coal-fired power plants. Our approach to developing CO2 capture is built around the business model we developed for our mercury control market. That is we are designing technology for existing plants rather than just new ones; we are pursuing technologies built around an expendable chemical that could produce a long-term revenue stream for ADA-ES. Since the commercial market for CO2 capture is some years in the future, we intend to primarily use external funding from DOE and utilities to support R&D activities in the premarket period.

To date, we've already received -- been successful in obtaining initial funding from DOE and the utility for testing and scale-up of sorbent-based CO2 capture. We recently submitted a proposal for R&D funding for a multi-million dollar project that included funding commitments from several major utilities. We are also pursuing additional areas around carbon management with the intention of providing technologies to address the needs of our power generating customers through a reduction of carbon generation, carbon capture, and beneficial use of carbon.

In summary, we continue to advance our business strategy to provide environmental technology in specialty chemicals to the power industry. We are enthusiastic about the rapidly growing commercial market for mercury control technology, confident about our position, and firmly believe that our aggressive strategy will take ADA to exciting levels.

I'd now like to open up the call for questions.

(OPERATOR INSTRUCTIONS). Graham Mattison, Lazard Capital Markets.

Just a quick question, a clarification -- you mentioned on the CO2 revenues -- when do you see those coming onstream again? Was that 2009?

Well, this again will be very much like what you saw in the mercury control business where, prior to 2007, it was our dominant revenue source. So we recognized some revenues in 2007. These were engineering revenues. We will recognize more. We expect this to grow as the mercury control engineering revenues tail-off, so this will be a replacement for that probably. With the amount of money being thrown at this, this could be actually higher than the Engineering Services revenues we got for the mercury control.

Okay, great. Then just in terms of looking at the greenfield activated carbon plant and the offtake agreements, you mentioned $250 million in offtake agreements that you would need probably from two or three players. Where are you on this level? I know you haven't announced anything, but have you selected the companies that you would be doing the offtake agreements with and are just in the final terms for it, or do you need to get the terms with the strategic partner done first before you can do the offtake agreements?

Well, what we announced this morning was our first offtake agreement.

So that one was it, part of it?

That's the first one we received; it's been in negotiation for a number of months. We will put out more details later this week once we get their final signature on this agreement, but that's essentially a five-year supply agreement starting in 2009 with a total contract value of about $35 million.

All right. Then the other offtake agreements -- are you in negotiations with companies or have you selected them yet?

We've announced that we are in negotiations with other companies and because of the size of these contracts, they are pretty significant negotiations.

All right, but so it's fair to say that negotiations are ongoing? You've agreed in principle that you just haven't gotten the final details done?

Yes, and as in most cases, until the final details are done, it's not a done deal.

I got you. All right, great, I will jump back in queue. Thank you very much.

Al Kaschalk, Wedbush Morgan.

c Mike, I just wanted to clarify, on the interim AC supply, that's coming from China suppliers, is that correct?

The initial agreement we had announced, the LOI with a company for the first 20 million pounds was with a Chinese supplier.

Could you just help me or others -- how will that be absorbed over the next 12 months? Is that working on customer offtakes on that, or is this part of these agreements, including the one signed this morning that you plan to use for that?

They are all interconnected, Al. For example, this agreement we talked about this morning has a requirement for delivery in 2009. This will have to take care of that delivery in 2009 because we won't be up and producing. We expect that we could have sales, successful sales that could start in the third or fourth quarter of 2008. If that's the case, that would all come from this source. So what it allows us to do is to compete on procurements.

What's happened with this market, without a federal rule with a strict deadline for everybody, there's deadlines at all different times. The Illinois rule has a mid-2009 delivery; the Pennsylvania rule is 2010. The new power plants that represent a significant portion of this are as the new plants come along. So there's no one from date that you have to be up and running; it's just a ramp of the market as each one of these new ACI systems begins operating and needing carbon.

Certainly there are risks, but what are your concerns about the ability to not have the supply disrupted due to events beyond your control, including government or Olympics and things like that out of China later this year?

Well, we don't expect a lot of revenues in 2008, so all of those are concerns. So, we are looking at doing a lot of activity around hedging those risks. Hedging those risks can be done in a number of ways. We expect to expand this hopefully up to -- through a variety of means, up to about 50 million pounds per year capacity. Some of that hedging the risk can come from storage, but those are real concerns and we're looking at ways of hedging them.

Okay. I'm sure we are all waiting and anxious for the partner announcement, but have you changed or maybe reduced your expectations that this would be multiple partners or is it really just you've locked in on one and look for that relationship to expand as you see the market continue to evolve and develop?

Well, that's where a lot of the complexity of the agreements come in, because we are setting this up as the ability for us and our partner to grow this business from one to potentially six production lines. So that creates some very complicated LLC operating agreements to allow that and have two different companies work at a 50-50 level to make those decisions as we grow. But the intent is that this will be -- at the AC level will be a partnership to grow this business as the market expands.

Okay. Finally, if I may, certainly construction and commodity costs are escalated. Do you feel like the $300 million is the top end of that estimate, or is there opportunity for that to be a little bit higher, given the current conditions?

Well, if you are following at all anything in construction these days and energy, steel is still going up at a very rapid rate, so you know, that's all possible. However, it's an issue that is reflective of anybody that might be doing this behind us; it is reflective of what we will have to do for pricing to reflect any changes.

Thank you, Mike.

Dan Mannes, Avondale Partners.

A couple of questions for you -- first of all, as you talk about the international sourcing opportunity, you said the initial batch is coming from China. Is this from the existing plant, or is this capacity that's going to be added there? Can you give us a little color on what your sourcing plan is?

Right now, we're working with a supplier that has an existing facility and the growth plan that will be finalized as it goes from an LOI to a full, exclusive contract will involve expanding their facilities.

Okay. Can you give us an idea of what their current supply capacity is or is it too early to talk about that?

I think it's too early to talk about that, but their current capacity is more than what we would expect of our 2008 needs.

Right. I guess just more broadly, our understanding is there are a lot of players in the Chinese market but very few have much in scale. So I guess I'm just trying to understand how much risk there is, if there's just sort of one person you are dealing with or if there are a number of potential counterparties, because we understand that market is pretty tight right now.

And that's true. This initial deal is expected to grow with some of their expansion to a capacity of about $20 million a year. Again, our goal is to put together total resources to give us a capacity of, by the middle to the end of 2009, of about $50 million per year. So, that will take another supplier.

I got you. You are in the LOI stage. Have you already gone over and seen the plant and done all of that, or you're still -- at what point are you in negotiations on that?

You know, as we've mentioned in the past, we've brought on some very significant expertise in the production of activated carbon, guys with a combined 60 years experience. They have gone over, viewed the facilities and given us a report on their expectations of likelihood of success and likelihood of -- the most critical part for us is meeting the quality that we will need to provide to our customers.

Understood. Then moving to the partnering and the greenfield plant, just for a second, can you talk at all about any deadlines now? I mean, you have the interim sourcing plan that you are developing, but given sort of the protracted time frame of locking up the partner, are you seeing any slippage as to when this plan comes online? Is there any risk around that?

Well, actually what we're trying to do is, as you can imagine, this market is not a cliff out there. It's this ramp, and this ramp is going to continue to grow and grow. So we've got this project that's a huge project, and trying to time -- optimize the timing of the expenditures around this to decide when on that ramp is the best time to have that production. So, it's not necessarily a bridge as trying to optimize the timing, so we're not spending money on capital prior to when we think that this thing will be fully sold out or when the market will be there. So it's a balancing act we're going through right now.

So you're saying it's somewhat strategic, the fact that you are -- I don't want to say "delaying" but you are working through the time (inaudible) in-service date; not so much that it's being held up by negotiations?

No, I'm saying the negotiation is not costing slippage; it's giving us a concern that we're going to miss the market. It's one of the realities of doing multiple legal agreements. Each one of these aspects that we've talked about -- the sales of offtake contracts and negotiations of engineering, the negotiation of the coal supply, the negotiation with the equity partner -- all of these are happening in parallel. Ideally, they could be done in series but we're moving them in parallel and therefore that ends up in less than optimized timing on things. But the project is -- you know, it gets better every day. The market get stronger every day, the surety of the market, so we get -- that part of it continues to give us optimism of the how strong and huge this opportunity ahead of us is.

Actually just to go little deeper on that point, historically I think you said probably $300 million to $400 million by 2010. Just given some of the changes in CAMR and also given what you've seen from the bidding activity, is that number the same? Is it bigger? Is it smaller but bigger the next year? Can you walk us through maybe how you see this developing a little bit?

You know, right now, we're not seeing anything that would change any forecasts that we've made because of CAMR, because we really didn't have a lot of large numbers in there due to CAMR.

Okay. Then you mentioned approximately 12 ACI systems that were delayed. These were bids out there or were these orders you had won that were delayed?

These were all bids. These were units that we had bid probably six, nine months ago that we had been told by the utility we're going to be awarded in January. So you look at 12 units out for bid, we've had a win record around 40%. So as we look at our budget, we expected to win about 40% of those. They would be to be awarded in early January, and we recognize revenue on a percentage completion, so if those were awarded in January and tight deadlines on delivery, we would have had some revenues from those in the first quarter. That's what we talk about, that we didn't meet our revenue expectations. That's because not that we had lost awards that had already been awarded to us, but just because of the procurement process and our win rate, we expected that we would have won some of those.

Okay. Then the last question -- on the contract for Ac, given the size of your international sourcing, that would seem to potentially cover this contract stand-alone. Is that sort of the perception now until you take the next steps? Is that sort of the backstop that gives the customer comfort here, especially since it comes online before your prospective plant starts?

Well, you know, that's absolutely part of the story. They are very much aware of where we are. They want to see where we are in the progress, and it's obvious that their initial deliveries can't be covered by the new production. So, we have to show them where we are in the production and supply until we are up and running. The testing we're doing with our product already gives them confidence and proof of performance that this will be a satisfactory product for them until the new production comes on.

This will be a firm take-or-pay contract sort of what would be needed for -- to support project financing?

Absolutely.

Great. Thank you very much.

John Quealy, Canaccord Adams.

(technical difficulty) touch on what you're seeing on the pricing front for activated carbon.

It's gone up.

Okay. How about -- how are your clients doing with P&C (inaudible) affecting fly ash sales at all?

Well, that is a decision. It's a well-known fact that activated carbon impacts fly ash sales, so that if that is a critical economic parameter, there are technologies, the EPRI TOXICON process allows you to get -- use both activated carbon injection in a form that allows you to keep your carbon sales. So, that's a is an option that they play off what is the cost impact of losing activated carbon sales and increased landfilling sales versus the cost of a new fab [refilter]. So those are options that are (technical difficulty) utility by utility basis.

All right, and just the last one -- Section 45 tax credits, when should we be thinking about those?

You know, it really depends on either Congress correcting this issue or the IRS (technical difficulty) Congress is not and them having to address it. But right now, it's uncertainty that almost precludes anybody from taking advantage of it because (technical difficulty) the concept of a market value for coal is not a firm (technical difficulty) definition.

All right, thanks.

Bill Burns, Johnson Rice.

(technical difficulty) -- your cash used in operations, what did you say that number was?

Bill, that was $866,000. The primary reason for that this quarter was that we had a significant increase in our accounts receivable as you'll see when the cash-flow statement comes out. So it was not really some other business decline there, but it was with systems that we are [billing] out for the ACI systems that we're building now, we just have a number of -- significant increase in those receivables that as you go through that accounting calculation of cash flow, that becomes a reduction in the cash flow for the quarter. So I think, for the year, we expect that to be provided from operations, so this is kind of an interim perturbation.

Okay, that makes sense. Do you have -- give me a feel for like cash used in investing? (multiple speakers)

(multiple speakers) you'll see it's around $3 million of monies that we've included in the project. As I reported in my script, the expenditures in the project for the quarter were about $4 million. Part of that is accrued where -- they haven't been paid for yet but they were accrued at quarter end, and some of that is broken out but the actual cash used for those investments is I believe a little is than $3 million. But you'll see that also in that cash flow. We will be filing the 10-Q in the next couple days as we get that EDGAR-ized and ready for filing.

Okay, well I will take the peak at it and if I've got questions, I'll give you a call. Thanks, Mike and Mark.

Alex [Bocock], Investment Management of Virginia.

My question has already been answered.

[Steve Santos], RBC.

Mike, Mark, just a couple of questions -- Mike, this revision to the CAMR that we are anticipating, is there any way to anticipate seeing an acceleration of those revisions before '09, or is this election gumming the whole works up in Washington?

Well, the CAMR coming through EPA just is fraught with potential losses, and this is because any mercury rule that's coming out of EPA requires an interpretation of the Clean Air Act. So any time they do something, they are interpreting the Clean Air Act and you see all kinds of issues, that some of these and up going to the Supreme Court -- did the EPA interpret the Clean Air Act correctly?

So we see that the only way around this is through legislation. If Congress says all plants have to control mercury by 90%, there's no room to sue Congress for passing a rule; there's no interpretation there. So we see the most likely process as happening through congressional legislation. Whether anything can be done in this Congress in an election year or not, we don't know. For example, there is a hearing, the full EPW Committee Senate Committee next Tuesday on Carper's 90% Mercury control rule. So there's some activity around it. It's still an important issue, but not a lot gets done by Congress in an election year.

Or many other times, for that matter! Just another question -- you had mentioned that the strategic partner will be taking a 50% stake. Will ADA maintain controlling interest in this plant in the long run?

Mark, do you want to talk about that from an accounting standpoint?

Yes, we are expecting, from an accounting standpoint, to be able to be consolidating the results of the operations there. You know, the controlling matter is determined by the controlling documents there, and we expect a 50-50 position there and for ADA to maintain that stance. But we expect that, on the financials, we will be reporting the full operational results of the venture.

Oh, cool. You had mentioned that, in addition to the $180 million in debt financing, you'll be required to come up with $120 million in equity financing. Does that additional equity financing -- will that require additional dilution? Is there any way to tell that at this point? (inaudible) the $3 million that you've already authorized?

Well, the shelf registration of the $3 million, that's been taken off-the-shelf. So that $120 million, a real simple model is that we had $25 million on our balance sheet prior to entering this process. We still have $10 million. We have the value of the capitalized expenditures to date. So, look at that as the $20 million. Then the strategic partner is putting in $100 million for the purchase of the project level and 3 million convertible shares. So you would well see the dilution of that 3 million shares.

Okay, that's good. Okay, well, good. Thank you very much.

(OPERATOR INSTRUCTIONS). Al Kaschalk, Wedbush Morgan.

Just to follow along clarification on the balance sheet, so the development project cost of $12 million or so at March 31, is that cost that ultimately could be shifted to the partnership or are those costs that ultimately will be shifted maybe property and equipment (inaudible) depreciated?

Well, they represent both, and so those are -- these development costs that we've capitalized those and we talk about that accounting -- accounting policies for that, and you can read about that in the Q and the K. So these are ones that have continuing value in that -- so it's not all of our costs associated with the project but it has those that have continuing value there.

We expect that will represent our contribution into the joint venture and that those will be capitalized and depreciated as assets there go into operation. So also as I mentioned to Steve there, we expect to be consolidating those results. So those are costs as you want to look at those that we expect eventually will end up in that property, plant and equipment area and will be amortized and depreciate off.

Very good. Thanks for the clarification.

There are no further questions. I will now turn the conference back over to management.

Well, again, thank you for your interest in our company. These are extremely exciting times for us as we make progress on this. I know shareholders would like to see things defined faster, but we are advised that, until contracts are firm, we cannot announce them. But progress is being made on a day-to-day basis. We will keep you informed of this progress that will be a significant change in the Company and our potential earnings. So I again appreciate your interest and we will keep you informed as these contracts move forward. Thank you.

Bye now.

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