Arq Inc (ARQ) 2008 Q3 法說會逐字稿

Good day everyone and welcome to the ADA-ES third 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 mode.

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 preparatory words such as believe, 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 factors 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 the ADA-ES 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.

Good morning everyone, and thank you for joining us for the ADA-ES third quarter 2008 conference call. I'm sure you have all read our news release, so I am not going to run through all the numbers. But instead would like discuss briefly our joint venture structure with Energy Capital Partners or ECP, ADA-ES' capital structure, and our financial position before I hand over the call to our President and CEO, Mike Durham, who will update you on several recent milestone developments. After that we will open the call for your questions.

Last month we discussed details of our agreements with ECP on a joint conference call, as well as published specific details in an 8-K. Let me highlight just a few key items.

ECP's plan is to invest in both the corporate ownership of ADA and directly in the activated carbon, or AC production, joint venture. The combination of the ECP investments and ADA's previous and planned investments and the joint venture funding mechanisms are designed to provide the equity we believe will be required to build the [$358] million AC production facility.

ECP plans to fund a minimum of 50% of the capital costs of the project in connection with its 50% ownership of the joint venture. Construction activities are currently being paid for from ECP's initial capital contribution of approximately $17 million made in October.

In addition, ADA and ECP signed a Securities Purchase Agreement providing for the purchase by ECP of 3.6 million shares of Series A and B convertible preferred stock of ADA. The first 1.8 million shares, or Series A, were priced above market at $9.37 per share. The second 1.8 million shares, or Series B, well be priced at a future date based on trading prices for ADA's common stock.

There has been some concern expressed by investors about the impact of the current share price on potential future dilution of ADA common shares and our ability to get the plant built. Let me be very explicit about these matters. First, in our agreement would ECP we capped the amount of common shares that we can sell prior to closing. In addition to their equivalent 3.6 million shares, we can bring to market no more than 1 million shares, so there cannot be any spiraling dilution.

Secondly, the JV agreement was set up so that fluctuations in our share price would not impede completion of the plant. In the event that ADA's equity contributions were to fall short of the envisioned 50-50 contribution, provisions in the agreement allow ECP to make up any capital shortfall in exchange for additional proportional ownership in the first production line.

We are currently working under a plan and schedule with Credit Suisse and ECP to finalize the debt required for the project by February 2009. Because of their extensive expertise and experience in project financing, ECP is taking the lead on the debt placement.

Turning to our balance sheet, as of September 30, 2008 we had working capital of $9.9 million, no long-term debt, and shareholders equity totaling nearly $35 million at quarter end. We have sufficient resources on hand for our existing operations and agreements in-place designed to meet the equity funding requirements we envision for completion of the AC production project. Mike will further discuss progress on the AC business and our other plans.

Let me start with the overall business environment for ADA. Our business, Clean Coal Technology, has become a very familiar and popular term to the American people. It is being used constantly in political speeches and debates by presidential, state and local candidates throughout campaigns this year. It has gained bipartisan support, and was in the national platforms of both the Republican and Democratic parties.

Even the current financial crisis and trouble in the Middle East bode well for the continued reliance on coal for 50% of our electrical power. Coal is by far our cheapest source of energy, and it reduces our reliance on foreign fuels.

Fallout from the legacy of the current administration on environmental issues includes a number of court rulings that leave the coal-fired power industry with no working regulations for SO2, NOx, mercury and carbon dioxide. Because of this situation, we believe an aggressive multi-pollutant federal regulation will be a high priority on the agenda of the new Congress and new EPA. It will likely have bipartisan support in Congress and approval of the new President.

However, even without a federal regulation, the current mercury market continues to grow as a result of existing regulations in over 20 states and Canadian provinces. As evidence of this, we are seeing continuous increases in AC prices during this year, reflecting higher demand by the power industry.

Even though we are new entrants in the AC production business, we have been extremely successful with getting commitments for our AC. In September we secured a firm fixed-price contract with Luminant for $125 million of activated carbon. ADA had previously announced another AC contract valued in excess of $35 million. Additionally, over the past three months the Company has had follow-up discussions and face-to-face meetings with several potential customers for long-term AC sales contracts in excess of $500 million.

Activated carbon, or ACI, systems currently dominate our revenues, and are the precursors for sales of AC. ACI system activity has increased over the past few months, and we recently received positive indications from customers on five additional systems that must be installed by 2009.

In addition, we have seen a significant increase in bidding proposal activity. Since the last update in August, we have bid or bidding on 16 ACI systems proposals. These offer potential near-term revenues for ACI systems and long-term AC sales.

As far as progress on building our first 125 to 175 million pound activated carbon production line, this quarter we achieved major milestones. Notably, we signed a contract with our EPC contractor, BE&K, a KBR Company, that began construction on the plant in August. This contract defines the cost to build, with limited potential for variances, and fixes the schedule. There are penalties for delays and rewards for early completion. There are contingencies in the cost structure, and the contractor has incentives for bringing the project under budget. We have also signed contracts for the long lead equipment that also guarantee equipment schedules and performance.

Finally, we achieved a major milestone in our equity partnership with Energy Capital Partners, whom we believe is the ideal partner in this project. They have solid financial resources, extensive experience in developing energy projects, a strong reputation in the industry, and an interest in investing in clean energy technology.

I want to make two additional observations here, because it is important to reiterate comments Mark made about these arrangements. With these agreements we do not anticipate any additional share dilution beyond what has been announced. And secondly, given the structure of our deal with ECP, our current share prices does not present an impediment to completing the plant on schedule.

Changing topics, let me update you on our refined coal product. In the Emergency Economic Stabilization Act of 2008 Congress included language on Section 45, which gave us both a one year extension of the placed in service requirement and elimination of the requirement for a 50% increase in the market value of refined coal. These remove a major hurdle for qualifying for the $6 per ton tax credit, and give us another year to sell our product. We are currently negotiating with three companies for demonstration programs.

We're also enthusiastic about our opportunities related to the control of carbon dioxide from coal-fired plants. Last week we signed a contract to advance the development our technology. This $3.2 million program is co-funded by DOE, as well as several elite power generators, including AEP, Southern Company, Luminant and Xcel Energy. We also have verbal commitments for additional funding from other power producers.

The confidence shown by these leaders in the coal-fired power industry, backed by R&D dollars, is further validation of the reputation that ADA has for developing innovative solutions for reducing emissions, making commitments and taking the risks necessary to meet their needs with commercial products.

We are excited about this business area because of its high visibility and potential growth. In the near term there are bills in Congress to increase annual funding for clean coal technology demonstrations to $1 billion or more. In the long term it represents a potential multibillion dollar commercial market that could greatly exceed the mercury control market.

Finally, let me briefly address two legal issues that have arisen in the past quarter. Because these involve ongoing litigation, I will not be able to answer any questions or provide additional information on these beyond these statements.

First, Norit filed a lawsuit in the State District Court of Marshall, Texas on August 7 against ADA, certain of its subsidiaries and two of its former employees, Steve Young and John Rectenwald, who now work for ADA. In its lawsuit Norit alleges that Young and Rectenwald have knowledge of Norit's trade secrets, and that they have provided these trade secrets to ADA in connection with the design of the Crowfoot project, the activated carbon production facility now under construction in Louisiana.

The Norit allegations are baseless. To date, Norit has not identified the alleged trade secrets that it claims Young and Rectenwald have taken and provided to ADA. ADA not used Norit trade secrets in the design of the Crowfoot project. Indeed, the Crowfoot project represents a new design, which among other differences, is significantly larger than any activated carbon plant ever built.

The case is in the earliest stages of development, with the parties to begin exchanging documents later this month and taking depositions in December. ADA has filed a motion with the court, moving it to require Norit to specifically identify the alleged trade secrets it believes were taken by Young and Rectenwald and shared with ADA. We expect a ruling on this motion in November. The case is currently scheduled for a trial in May of 2009, but that could certainly [stage].

In a second case this week, in a counterclaim we take legal action against Calgon Carbon Corporation to recover commissions of $8.25 million from Calgon as a result of sales of activated carbon. On March 20, of 2007 ADA and Calgon signed a memorandum of understanding, or a MOU, providing that the parties would jointly market AC to the power industry, with Calgon supplying the AC and ADA leading the sales effort.

The MOU provided that Calgon would pay ADA commission on all sales of Calgon produced AC resulting from this joint marketing effort. Calgon has informed us that it will not pay the $8.25 million commission on a $55 million contract that resulted from this joint sales activity under the MOU, and instead commenced an declaratory judgment against action in the Western District of Pennsylvania, what ADA has now filed the above counterclaim. Because our claim was just filed this week, we did not yet have an estimate of a litigation schedule.

Let me summarize by stating, we recognize that there is a tremendous disconnect between the fundamental value of ADA and the Company's market cap. For example, at one point last week our stock price reflected a market cap of only $22 million. Yet as of September 30 we have $14 million of cash, no debt, $35 million of shareholder equity.

We have signed agreements with a well-capitalized partner to provide the project expertise and equity capital for the construction of our AC production facility. We have signed $160 million of firm fixed-price contracts with major power companies for our AC product, and are in the process of bidding on another $500 million in AC sales. We have a sound base -- equipment basis. Are entering a new market for clean coal technology that could be many times larger than the mercury control market.

We realize that in today's Capital Markets we are just one of the many solid companies that find themselves significantly undervalued. We will continue to execute on our business plan and continue to tell the ADA story to existing and potential investors. By doing so, we believe the equity markets will eventually reward ADA shareholders with a valuation that reflects the Company's prospects and substantial earnings growth.

Before I start taking questions, I would like to briefly mention that I will be in New York on Monday and Tuesday of next week, presenting at the Ingalls & Snyder's Special Chemical Conference and conducting investor meetings. If you would like to schedule a meeting during that time, please contact Melissa Dixon at The Equity Group. Her contact information is in our earnings release.

Now I would like to open this up to your questions.

(Operator Instructions). Al Kaschalk, Wedbush Morgan.

Just to clarify, this Series B that was done, 1.8 million shares, so that should be added to the roughly 6.1 million outstanding at the end of the third quarter, is that right?

Both of those -- the Series A and Series B will not be closed on until after we receive shareholder approval and we move to closing, which is planned no later than the end of February. So they are not outstanding at the present time.

But the cash -- maybe I misunderstood then.

The initial funding that ECP has made into the joint venture -- that is funding operations at this time -- is their investment in the joint venture directly. So the cash matched our -- the spend that we had in our development costs up through the end of September of roughly $18 million. They put $17 million in October. Another $1.3 million in cash will come in in November. That matches our development costs that we put in the project to date. And that will provide the cash and funding needed for the venture during this early part of the construction.

The other funds from the investment at the ADA corporate level are expected to come in at the end -- near the end of the first quarter of 2009 when we close on the preferred equity placement.

And that is the timeframe when they expect -- the debt is expected to close as well?

That is correct.

Can you add any color on where you are at in that process, given the market conditions and your progress here as you're sourcing this debt? Meaning are you just meeting with folks right now or are you down to term sheets, or --?

Term sheets have been developed. We have selected most of the consultants and experts that will be putting their reports together that will accompany our presentation to the rating agencies. That initial meeting with the rating agencies is expected in early December. And so we are moving on an aggressive schedule that Credit Suisse has put together and that they have been through countless times. We are confident about that. And as the markets are calming down here and we look forward to successful placement in the first quarter.

Just to follow up to that, and I appreciate the prepared remarks. But one of the elements I think is the Company's requirement to fund its working capital and operating profit in the range of around $20 million.

I would suspect you're not going to keep a zero balance in cash on the balance sheet, at least I hope you wouldn't. But how does that timeframe fit in to the grand scheme of the schedule here in terms of generating that level of working capital or cash flow from operations?

The funding mechanisms that are provided in our agreements with ECP allow ADA to maintain very sufficient working capital for its existing operations while the construction of the AC facility continues on. We have made commitments to put in our initial $17 million of cash. We have spent another approximately $8.5 million on top of that, with the further funding then coming from the proceeds of the purchase of the preferred shares by ECP. Given those transactions, that leaves ADA with very adequate working capital for its existing operations.

If I can add one note to that. There is a mechanism so that, even though those proceeds may not be available until shareholder approval, there is a mechanism in the agreement that ECP will provide as a loan to ADA that capital at that time. So we don't have to put our working capital in jeopardy.

Then just a housekeeping question as it relates to the bigger issue on the outlook for activated carbon and what you have contracted and what you have met with.

Mike, I was interested if you could comment on your takeaway from your meetings, why maybe some of the potential customers haven't necessarily signed up yet? Or maybe said a little differently, how are you viewing the gap between $160 million, and I think it is $250 million is the target, between now and when you need to get that signed up and the banks then to do the necessary lending?

What we have announced is that $250 million goal is a goal that provides the optimum debt configuration. So at less than that, it would be less than -- a little higher debt rates, more mezzanine level. This is a customer that does not move quickly. We have, for example, the Southern Company contract that started in October and under contract in May. Luminant was over a year. Of course some of that delay was due to the delay related to the acquisition of the BE&K.

We are out actively responding to bids by the utilities, of this $500 million. We're going through the process with them. They take months to make these decisions. Luckily, this process goes back another six or seven months.

We are confident we're going to get to that additional placement of another $100 million or so prior to that debt being in place, because it is very active market. Pricing announced by competitors has gone up continuously over the years -- over the year. Our pricing has gone up through the year as a result of the tightening of this market.

So it still sounds like you don't really need the next $90 million to negotiate or to finalize the debt, or you in fact are hearing that you do need it, and therefore that should be something we should be focusing on in your milestone?

We're going to -- we think these will be the milestones that we will be announcing. This is a very fluid situation. Obviously, the debt situation is very fluid. The amount of contents we have is very fluid. So it is a very integrated process of placing the debt. But as we sell additional contracts, we will announces those contracts.

Graham Mattison, Lazard Capital.

I apologize, I actually got on the call a little bit late, so I apologize if these have already been covered. But when you're talking to your customer utilities out there, are they giving you -- is there any hesitation or concern on their part, given the potential changes to new source review or also the potential new administration or what might come out of the camera, or is it really being driven by state regulations at this point?

All of our discussions to date are based on regulations that are in place today. You look at rule like in Pennsylvania that is impacted by new regulations. They have a state regulations and a lot of those state regulations have (technical difficulty). And their state regulation on mercury is fixed. And how a lot of the utilities there were going to achieve their mercury control was buying scrubbers that were being based on CARE. Now that CARE has been thrown out, they are looking at additional ACI systems for those.

So there is an interaction there, but nothing at all negative because these are firm regulations that have to be complied with. So if anything, I think there's some eye on the fact -- most of the customers we talk to see that there is likelihood of a federal rule coming. And if anything, their needs are going to be even higher than what they are buying for right now for the state regulations. And that makes them a little bit more comfortable about these take or pay type contracts we are requiring that they sign up for.

Then in terms of the timing of the new plant out there, are there milestones that we need to be looking for? In the event that these milestones don't get hit for some reason, are there penalty clauses with the contractor that could offset some of the delays in terms of meeting the output commitments that you have?

There is two answers to that. All of the contracts -- we have basically two major contract here, one is the EPC contract, which covers essentially all of the plant, other than the furnaces. They have costs -- the costs are defined, the schedule is defined, performance is defined with penalties if those schedules aren't put in place. The same with the contract for the multi-hearth furnaces.

Relative to the interim supply, is both of the contracts that we have today require delivery in the first or second quarter 2009, a year ahead of that plant. So we are, in addition to building the new plant, we have purchased an existing facility that is a part of our interim supply plan -- that is taking foreign produced carbon, chemically treating it, milling it, and providing it to our customers right now.

We're also building a larger interim facility to allow us to increase volumes for 2009 and 2010 to meet to the volumes required in our current contract. So we will have the mechanism in place that if there is some slippage in schedule, what it means is that we are providing from a facility that is not as high a margin as the margins we will see from the product produced completely from scratch in the Crowfoot facility.

Mark Segal, Canaccord Adams.

Just wondering if you could give us a sense of what your budgeting expectations are for your ongoing litigation activities?

The costs there are dependent upon our responding to the claims. We see that stretching out for some period time. They are going to have some impact on our G&A costs, but we don't -- overall don't expect those to be significant.

Then in the past, I know you guys have spoken about 50 to 100 bidding opportunities, if you will, for ACI systems. I noticed in today's release you used language more like 30 or 40. Just wondering if this activity is consistent with your expectations to slow down and -- do you see the 30 to 40 bid opportunity number as solid through '09?

Just to discuss the difference between those two numbers, the 50 to 100 was what we saw that would be bid on in 2008 and 2009. So there has been a number of proposals already submitted this year, so that 30 to 50 now reflects what we see based on rules that in place today day from here on. So it is really just an update of what we expect to see beyond what we have announced that we are already bidding on.

That clarification helps. Then on the five systems that you guys have received positive indications on, where is your confidence level there? And can you provide us with any sense of timing when those opportunities might move forward?

Each one of these is a little bit different, and it just reflects the nature of the contracting mechanism, the sales opportunity. They vary every way from, they have told us that we are going to get the contract for this. They are under pressure to do it. And so the first part of the contract is they will turn on the initial part of the engineering for the equipment. So we don't have a contract for the whole ACI system. It is saying, get started on what has to be done in the next two to three months.

Everything to that firmness to the fact that on a new plant we bid to several OEMs, and some OEMs we don't bid to. In this case when we hear from an OEM that we bid to won the overall contract, we're confident that from past experience that we will end up with that confidence. Relative to timing, all five of these have to be installed and up and running in 2009.

Then lastly, given the congressional changes to Section 45, can you provide any more color on what your expectations are for the refined coal JV in '09, perhaps beyond as well?

I think what we're looking at is now that has been moved out a year, so we have to have the equipment installed and up and running by the end of 2009. So we will -- the plan is a series of demonstrations during this year and hope for them to be in place.

With that in mind, with this hurdle removed there's still a number of other issues that has to be resolved. But these are all issues that we're working through with the IRS and the Treasury Department on that they feel that they can provide the approval of where -- the fair market value issue was something they couldn't have addressed because it is written into the law. So this is a major hurdle.

What we're looking at right now is still a market of -- and our market is defined by these certain kind of boilers, Cyclone boilers, burning PRB coal, and in a state that requires mercury control. So we look at that near-term market that we're going to go after this year, it is on the order of 10 million tons a year of refined coal that, if we got that in place, we would be looking at those revenues in 2010.

Bill Burns, Johnson Rice.

Could you give me an estimate of what your cash flow from operations was for the nine months?

For the nine months we were -- cash flow from operations grew to slightly better then breakeven. I think it was just a little less than $100,000, but it was a positive number.

G&A sequentially looks like it bumped up just a little bit (multiple speakers).

We have been -- certainly with the activities surrounding reaching these major agreements, with not only for sales of activated carbon, but with ECP as well, we have had a lot of expenses that flowed through the G&A line. So as we noted there, legal expenses were considerable. I would say in the third quarter the legal expenses were more related to completing these agreements than they were to any litigation matters.

That is where those costs have increased in that area. And from adding staff, we have been gearing up for what the construction and operational efforts for the new activated carbon facility, as well as continuing in our staffing and growing for the market that has been growing with the injection systems.

I heard that dreaded term, New Source Review. Remind me again why when you installed this activated carbon injection system that you do not fall and cause the plant to come under New Source Review.

It is such a small amount. One of the triggers on that is how much money you're spending on the planet, and does that kick it into New Source. Our equipment is only $1 million. So if anything, New Source Review could help us, because what it would -- what we're seeing from some of the New Source Review cases is when a utility gets hit with a New Source, the judges declares that, yes, you did enough changes to this plant that you should have been under an earlier emissions regulations. And you haven't been meeting those, and therefore you have the potential fines of $1 billion.

So then it is a negotiation on what that utility is going to do. In the past they have agreed, okay, we will add this many new scrubbers and this many SCRs. What we are also seeing in these now is they are also throwing in, okay, we will also add mercury control on some of our plants, because that is only $1 million kind of effort, so it is an easy thing.

So New Source Review has no impact on us. If anything, it could create some additional markets in states where right now they are not required to control mercury.

Then lastly, the possibility of the multi-pollution control bill, looking at carbon dioxide and mercury, it seems to me that the carbon dioxide -- this future impact of some distant greenhouse gas effect, has kind of overwhelmed the neurotoxin mercury. It just seems like the mercury is getting kind of shoved back to the back door, even though it will harm you today.

Yes. They just talk about CO2 just sucking all the year out of the room. So it is the sexier one. But what we have seen going on in Congress, for example, I testified at a Senate hearing in I think September on Senator Carper's four pollutant bill. And that had other testimony from utilities, from environmental groups, from state agencies. And I was representing the equipment supplier.

It was pretty much unanimous from that, that as they move forward there is a huge urgency around getting SOx, NOx and mercury taken care of. Because with the CARE thrown out, there are scrubbers in progress that they don't know if they can put that into their rate basis. There are states that are required to meet ambient levels that those plans to achieve those ambient levels were based on this equipment going in from CARE.

So everybody has this urgency to fix SOx, NOx and mercury. And they all recognize that CO2 is such a different animal. The equipment doesn't really exist to date. It is so complicated, such an impact on the economy that it would be best to move forward with a 3P bill, and deal with carbon dioxide as a separate entity.

Because you are right, CO2 has the tendency of just getting all the attention, and yet there is some major issues around these other criteria pollutants.

The CO2, like you said, there is a lot of things you've got to work out on that. All right, Mike and Mark, thanks a bunch.

(Operator Instructions). Dan Mannes, Avondale.

A couple of quick follow-up questions. First, let's start on the legal side. Without asking about the terms of any of the lawsuits, can you guys make any assumption on what it will cost, or what the potential cost would be, not in terms of settlement, but just ongoing? Just because a bit of concern this could be a bit of distraction for you guys as well as a bit of a cost.

We know what some of the initial costs have been, and we're looking at a few hundreds of thousands of dollars. But as Mike mentioned, the Calgon matter has just been filed and there's no schedule out on it, so that we don't have a chance to look at how that looks over time.

The matter with Norit is just starting into the discovery work, and so there again it just starting there. We will see how that proceeds as we've got a couple of motions out there as well to be answered upon. So it is difficult to say, but early on the budget that we are looking at thus far is at (technical difficulty) [$200,000].

I'm sorry. So a couple of hundred thousand dollars, you think?

Yes.

Next quick question. Just on the interim sourcing plan, you guys didn't talk too much about that on this call earlier on. I was just wondering if you have had any update on your success in being able to source, what the availability is relative to your original expectations, given the tightness of the market and given -- and can you talk at all about what impact, if at all, your current interim sourcing plan has on your negotiations?

We are moving forward with the plan. We know what our commitments are. For example, with Southern Company and Luminant on these existing contracts, 2009 delivery. We're comfortable that we're going to be able to obtain that amount of material. We are comfortable that we're moving forward sufficiently with our new larger interim facility in Louisiana, not far from the Crowfoot plant to be able to do that.

So with that in place, we're comfortable with what we have sold and be able to meet those demands. We're now, as we're out bidding on other projects, we're not promising any additional 2009 and first-half 2010 deliveries beyond that. We're selling, for example, what we anticipate will be a reasonable schedule coming out of the Crowfoot plant.

Is that an issue at all, given that a lot of the customers do have demand either in '09 or '10?

It is an issue, but it is not a deal killer just because there is not enough material out there to meet all the demand. What we have seen, a utility will put out a RFP for their material. And they say, we'll need this much in 2009 and this much in 2010 through 2015. And we will say, we're not going to take any of that 2009. Here's what we are willing to bid. And then we are called back in for our follow-on meeting.

So that is not throwing us out of that because we can provide the potential of a very reliable supply through that period once we're up and running.

Can I read into that that it is likely there will be less sole-sourced awards in the future, just given the lack of availability in the front period? Maybe they are just scrambling to get in the '09, '10 period until your plant is up and running?

I don't know how they're going to do that. It seems like each utility is a little bit different. You see that both Luminant and Southern Company essentially gave us all of their supply. But, yes, if they have demand in 2009, and we're not bidding until the middle of 2010, they may well need another supply, a shorter term supply contract to cover that early period.

Then as you look forward to the prospective financing of the plant, aside from obviously getting more contracts, and you have talked about that, any other key elements that need to come together prior to the financing?

We are in the process of putting in our coal supply agreements in there that are financeable. So from that standpoint, we're looking at both a long-term and a near-term issue. The long-term is a way of guaranteeing our long-term cost of feedstock for the life of the plant. We're building in these areas of low-cost supply, and we're not worried about transportation costs increasing. So that is our long-term supply to get that firmly in place.

The second is the banks want to see in the near-term that there is definitely going to be coal supply at all times. If something happens to your normal supply, where are you going to get fuel for that? We are in the process of putting in a shorter term supply plan too.

All of that will have to be in place to the comfort of the lenders. As Mark says, the process we're going through is providing consultants to the rating agencies that make them comfortable, both all aspects of it, the AC market, the coal supply, and other issues that would influence our ability to run the plant.

Then just the last question, just on the time schedule. You mentioned again you're negotiating, or at least in discussions, with multiple counterparties for supply, but given the lack of ability to force that decision be made to sign the dotted line, how do you think through what the current schedule is for the completion of debt, as well as what the contingencies are if the contracts aren't signed in a timely manner?

The contingencies are -- is that by the time we go to debt, our highly financed partner could be $30 million, $40 million, $50 million into this. They've got sufficient -- they are not going to stop funding because the debt is not available on particular a day. They need to get their returns. So the contingency is we will be in a position to continue to fund this project until the debt is available.

You are saying there would be no point where a delay in getting the debt available due to other some other contractual reasons would result in a slowdown of the project development?

You made an absolute statement. There is no thing that can happen. We do not anticipate that we will not be able to continue to keep this project on schedule.

(Operator Instructions). [Steve Santos], RBC Wealth Management.

Just a couple of quick issues. Mike, could you readdress the issue that came up from Piper's downgrade of Calgon, addressing the pricing going forward? And possibly if you can address it, the margins that you see going out into the 2010, '11 timeframe on activated carbon? I know you addressed it in your press release.

Also, if you could define a little bit what the applications are in Eastern coals in using the ECI system.

On that, let me just talk more general about the market. The market is as strong as we have ever seen it. One of the evidence of this is you can look at inside behavior here, and ECP has been an insider to this project for the last nine months. As they have participated, a lot of things happened that created hurdles to moving this forward -- the acquisition by KBR that set this project back about four months, the debt markets and the financial situation. Yet after all through this ECP was there and still liked it enough to move forward with financing.

That is because, as you look close, you participate in this market, you get more and more comfortable, not only is this market as strong as I said it is, it is growing, and the likelihood of growth has continued.

What we are seeing in there, in that analysis, it is difficult from the outside to really get a really good look at what the AC market is, if you're not involved in these day-to-day meetings with customers. Having worked on this for the last six years, we know which plants need how much activated carbon.

For example, in that it excluded sales of activated carbon to plants that burn bituminous coals, yet 20 of the 90 contracts led to date by the industry are on bituminous coals. There was no mention of the Canadian market, which is right now kind of -- I can almost say dominates the market. We are seeing an awful lot of activity both on ACI systems and sales in Canada. New plants don't show up unless you're dealing with the project themselves. So there's a much bigger market then you can see from the outside.

On pricing, in the spring we put a pro forma showing very nice returns from that is -- from the Crowfoot project of about 65% EBITDA, if we could achieve an average prices a $0.75 a pound. Well, our first two contracts for our anchor tenants are above that level. Right now what we're bidding is now closer to $1 a pound or more. And we are seeing market pricing up to $1.20 or $1.30 a pound.

So all the dynamics point to this is a very, very strong market. It is getting stronger all the time. With the federal rule it will get even stronger. The worldwide dynamics, the supplies are drying up from overseas supply. So we and our partner from the inside of this -- this is a great, great business decision.

You your projected margins for -- I think you had mentioned sometime back that 20% should be very sustainable going forward in your opinion, I assume from your comments?

No, 20% margins?

I think that was a net margin. I don't recall specifically.

The guidance we have given is that this plant will be producing at these lower prices -- conservative pricing, about EBITDA coming out of this of about 65%. If you are talking about ROIs or IRRs, I think there we were talking in excess of 20%. And that is still valid.

Also just another question. The NexGen is still very committed on the Section 45 project?

They are more excited now, because with this correction that we got in this legislation, now it opens it up for the tax credit part of the business. So without that, we would have been selling just a chemicals only business. And the chemicals only side of the business from a revenue side into the JV there was on the order of $2 to $3 a ton of coal. The tax credit is $6 a ton. So having that additional $6 available to throw on top of that is pretty significant.

So they are still pretty committed. Excellent.

Yes.

Al Kaschalk, Wedbush Morgan.

I was wondering if you could just -- or housekeeping item on the cash flow from investing part of the cash flow statement, in particular, CapEx and the delta on the investment and development projects?

You'll see that in the Q that we file tomorrow. But the runrate there was similar to what we saw in the second quarter, with the CapEx continuing to flow into the development projects for the AC manufacturing facility. For the quarter, as I recall, it was around another $4 million that we have spent on the project there. So that was the majority of the financing activities that occurred in the third quarter.

CapEx, what, excluding the project, should continue to be less than [$100,000]?

It is a few hundred thousand. We are adding -- our other base business is not capital intensive. So this is just the leaseholds improvements, the computers and things like this, and furniture that we are adding as they relate to personnel additions here. So it does run -- range in the few hundred thousand dollars.

[Rich Gamble], Black River Asset Management.

Just trying to get a little bit more color on the rule change on the clean coal side. You talked about the subtleties of coming from a tax IRS standpoint, and now that the rule is out of the way that there is more work to be done.

I am just trying to get a feel for if there are some milestones or some things that we should be looking for to monitor the progress of your guys -- of that project, or how -- the clarity on the demand, you were talking about the 10 million tons of PRB coal, where it would really apply initially. I am just trying to get a little more color on how we should be looking at that opportunity.

The correction was that there was written into the original rule that there had to 50% market -- increase in the market value of the coal. That was just a really difficult term to define. The IRS didn't know what to do with it. We didn't know what to do with it. And while at the same time PRB prices and all coal prices have been going through the roof, and so it was a moving target, a more difficult target.

The correction that was made in the bill was to eliminate that need for 50% market capture. And then they increased the amount of reduction in mercury that the technology has to achieve from 20% to 40%. We were already achieving in excess of 80%, so what it did had no impact on us.

The remaining issues are really things that won't be publicly announced. It is now a matter of working with the IRS. For example, they have never had to deal with emissions reduction. For example, working out with them details on how do you want us to measure and validate that that we're getting this mercury reduction, this NOx reduction, and those kinds of terms.

So that is just rulings that will be pretty subtle relationships between our agreement with the IRS. So there is nothing going to happen on a national basis that will do that. So really the only thing you will be able to see as we move forward is as we sign up on contract for a customer for those and announce that.

But are you going to be working with others that are also pursuing clean coal that would be affected by this? Is this as a group you're looking for clarification from the IRS in terms of how companies can claim some of these credits, or is this really something you guys do on your own?

We can't do on our own, because in each one of the companies that are providing a potential technology -- that are trying to get a part of this Section 45, they are all different -- different approaches, different markets and everything else.

So for example, during this process of getting corrections in the energy bill that resultantly came actually out of the Wall Street bailout bill, we're almost in competition as we would -- our lobbyists would let us know that his other lobbyist for another company is pushing.

Because everybody is obviously looking for a correction that fit their technology. For example, a lot of them didn't care about this 50% market value. If they are using a waste coal, increasing its value by 50% was not a problem. So we actually got what, as everybody is referring to it, as the ADA fix in this. A lot of them didn't like it.

As we are now looking for clarification on these other issues, how do you monitor these programs? Because of the difference in the technology, we're going to propose a way of monitoring it that may not be applicable to these others. So this is something that as we move forward with a customer, we then make a presentation to the IRS. This is how we're going to show that we're meeting the requirements of the law. And we get rulings from IRS. They would love to make more generic rulings if they can, but this is something that we probably won't be working directly with the other companies.

This will have to be done within the next year in terms of -- in 2009 you have to achieve the sale?

Absolutely. The equipment has to be placed in service, which means up and operating and producing the client coal by the end of the year.

The work done before this, you had done a substantial amount of work already in this sector on this project, if I recall. So you already have had customers have done test burns, etc.?

Yes. And all that is applicable.

Is that something you have disclosed in terms of which customers have done test runs and where you guys are in just terms of the development of your own technology?

What we have disclosed is the success that we have achieved, the NOx removal that -- and I forgot -- we haven't disclosed specific customers. But we have disclosed the number of tests that we have done, and that we have achieved the levels of NOx and mercury that is needed to qualify for this tax credit.

What is the economic -- what are the economics of say 10 million tons of this PRB coal, which is your initial target, where you think you have got the value proposition, what does that mean to ADA? Can you give me some sort of sense for what this financially would mean?

I think if we look at a model that first -- it involves potentially sharing some of the tax credit with the utility as an incentive for getting involved, and then it flows through a 50-50 JV. If we qualify for the tax credit, the first one that qualifies, we then will get a $4 million payment -- quarterly payments. But the obligation will kick in for $4 million from NexGen. And then the bottom line after the flow through to the utility partner and the JV is somewhere in the $1 to $1.5 a ton to ADA.

To ADA or to the JV?

To ADA.

So all-in, this could be a fairly substantial near-term opportunity for you in the sense of 2009 near-term revenue.

2010.

2010. You have to have it installed by '09, but you wouldn't really start seeing the benefits until 2010?

Yes, and then it is a ten-year program. So that is 10 million tons per year.

Why the 2009 deadline, if there they are really just wanting to see the initial kind of deployments play out and then kind of re-evaluate? Do you see this as something that might get extended or --?

The old rule ended the end of 2008. So as they are looking -- and these extensions programs, as we were negotiating with what ended up in the Senate bill that we thought would go into the energy bill, they had these pay go provisions. So you are trying to offset how much this is going to cost if they do this for us, and where are they going to get that money? And if the longer they extend it, the obviously -- the more costs is going to be associated with it.

As they were pushing through the Senate bill, we realized that if we added a multi-year extension, then we would have been tagged with a burden of a much higher perceived cost of this fix. And therefore it would have been harder to offset.

What we ended up with agreeing is we could live with a one year extension. And that was what was in the Senate energy bill. And so when they tacked this on to the Wall Street bailout bill they just took that language.

Why did you say only 10 million tons of PRB coal is the target? How do you come to that sizing, given the amount of PRB coal that is used in some of these Western plants?

There is two issues. First of all, our technology only works on -- is only applicable to Cyclone boilers that burn PRB coal. And then we're got to look at who is going to be interested in this. And there are people that potentially are faced with a mercury control regulation that might have a need in 2009.

So when we look at that subset, PRB as a first cut, Cyclone boilers is the next cut. Where are they interested in mercury control, that is the next cut. And that is about 10 million.

If we look at -- if we get a federal rule that expands the mercury to other states, now we might be faced with a situation of somebody that might not need mercury control until '11, 2012. We might be faced with a decision of, well, we can go ahead and install the equipment this year and get it up and running, and take advantage of a larger market down the line.

So is this a replacement? Would this be a substitution for ACI systems if they burned -- or is this in addition to?

It depends. It could be an n addition to, but in some cases it does compete with it. But it's a higher margin payback for us. And it is such a small market it doesn't really interfere with the overall ACI market.

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

Thank you. Again, we are excited about the progress that we're making on this project. We've got a great partner in ECP. You will see us moving forward together. It makes us a lot less dependent upon being poorly capitalized, and our current stockprice as we move forward in these aggressive capital plans. But we now have a partner that makes us less sensitive to that.

We will keep you informed during this next quarter of things that will continue to show progress, additional AC sales. I don't know if we will be able to announces any substeps relative to achieving the debt. But right now we are geared to have that in place in February. And we will keep you informed of that.

We thank you again for your interest in the Company. We will continue to execute on our business plan. Thank you very much.

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