Arq Inc (ARQ) 2009 Q2 法說會逐字稿

Good day, everyone and welcome to the ADA-ES second quarter 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 21E of the Securities and Exchange Act of 1934 which provides a Safe Harbor for such statements in certain circumstances. These statements are identified by prefatory words such as believe, will, hope, expect, anticipate, indeed, 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 the ADA-ES filings with the US Securities and Exchange Commission with particular emphasis on the risk factors disclosed contained in these 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 presented as of today's date and ADA-ES disclaims any duty to update these unless otherwise required by law to do so.

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

Thank you, Christy. Good morning, everyone, and thank you for joining us for the ADA-ES second quarter 2009 conference call. First, I'd like to discuss the Company's financial performance and then our President and CEO Mike Durham will update you on the Company's recent corporate developments and our future plans. After that, we will open the call for your questions.

Before I address the quarterly results, I wanted to alert those on the call to the fact that our second quarter financial results do not consolidate the results of our subsidiary, ADA Carbon Solutions, LLC, our AC supply business joint venture with Energy Capital Partners and its affiliates. At the end of the second quarter ECP converted out of its preferred equity contributions, decreasing our ownership to 49%, and giving rise to the de-consolidation. As a result we do not include Carbon Solutions' revenues and expenses with ours but report our equity in their operations as a single line item in other income and expense.

Revenues amounted to $4.8 million for the quarter as compared to $3.8 million in 2008 due to increases in both our Mercury Emission Control or MEC segment and our flue gas conditioning and other, or FGC segment. MEC revenues increased 16% during the quarter due to increased revenues from our activated carbon injection, ACI System sales. For the quarter revenues from ACI Systems contributed $3 million of the MEC revenues as compared to $2.2 million in 2008. We had contracts in progress at quarter end for ACI Systems totaling approximately $7.5 million, of which we expect to complete and realize as much as $6.4 million in 2009 and the balance in 2010. We have commenced work on seven new systems thus far in 2009 and we expect several more to be awarded. Various consent decrees in place, state regulations and new plants are driving the current market in this portion of our business. We believe the eventual outcome of the EPA MACT process for mercury control or legislative action will accelerate and expand that market further.

As anticipated, revenues from DOE and industry supported demonstration contracts decreased for the quarter, contributing $874,000 to revenue as compared to a contribution of $1 million in the second quarter of 2008. The remaining unearned amount of our DOE contracts was $2.7 million as of quarter end of which we expect to recognize $1.2 million in 2009 which amount includes cash contributions by other industry partners, the majority of which is related to our CO2 capture work. The government has ceased funding new mercury demonstration projects since that market has moved into a commercial phase. We expected that increased funding for our CO2 control technology will continue to replace that source of revenues for us in the future. The recently passed stimulus package included $3.4 billion for development of clean coal technologies to provide funding for the types of projects in which we are involved.

Mercury-related consulting work contributed $481,000 of revenue for the quarter compared to $480,000 recognized in 2008. FGC and other contributed $393,000 of revenue for the quarter compared to $89,000 in 2008. The increase is primarily due to services we are providing to Carbon Solutions which amounted to $290,000 for the quarter.

Our gross margin in the quarter was 38%. The same margin realized in the second quarter of last year. Margins for the year are expected to be similar to those recognized in 2008. Research and development expense in the quarter decreased to $45,000 over the same period in 2008 reflecting the scale back in mercury-related demonstration projects. We anticipate that our future R&D expenses will grow in direct proportion to DOE funded CO2 work which we will perform over the next several years.

General and administrative expenses increased by $2 million to $3.5 million in the quarter primarily due to the inclusion of $2.1 million of legal fees related to our existing litigation. Included in our G&A expense for the quarter is noncash share based compensation expenses totaling $201,000. Our operating loss for the second quarter of 2009 was $2 million as compared to a loss of $363,000 in 2008, due in large part to the legal costs mentioned above. The assets and financial results of Carbon Solutions have not been consolidated in ADA's financial statements reported for June 30th, 2009, as noted before, but will be summarized in the footnotes to our financial statements.

Activated carbon sales amounted to $2.1 million in the second quarter and property, plant and equipment and other long-term assets totaled $120 million at June 30th. Our portion of the JV's loss for the quarter amounted to $665,000. Ongoing construction and operating costs are expected to be funded by ECP until we can secure acceptable debt financing. As a result of the above noted figures, we are reporting a net loss attributable to ADA of $1.6 million or $0.24 cents per share compared to a net loss of $198,000 or $0.02 cents per share for the same period in 2008.

Cash flow used in operations was $456,000 for the quarter compared to $903,000 for the same period in 2008. Capital expenditures for the quarter totaled $181,000. Our balance sheet as of June 30th, 2009 reports cash and cash equivalent of $1.3 million and working capital of $4.7 million. We have no long term debt and shareholders equity totaled over $30 million at quarter end.

Mike will discuss the status and progress in the AC Supply joint venture and our other activities further and I'd like to turn the call over to him.

Thank you, Mark. Let me start by stating that the overall business environment for ADA and clean coal technology is rather positive, as coal remains an abundant and secure energy source for our country, yet there are demands to burn it cleaner. However, because ours is a regulatory driven business, we are dependent upon policy makers and as a result there's often a level of uncertainty about the timing of our markets. On the positive side, the EPA entered the new administration and Congress are moving forward with regulations that require additional reductions in emissions in coal fired boilers. EPA is developing a MAC regulation for mercury and have fixed the rules for sulfur dioxide and nitrogen oxide emissions. EPA has also proposed MAC regulations for emissions of mercury from cement kilns. ADA is already under contract to conduct testing programs for cement companies to define their missions and evaluate how our ACI equipment assortments will work in that industry.

There are also bills that include mercury control being discussed in both the House and the Senate with support from both parties. Our analysis indicates that either of these two approaches would result in a market for activated carbon in excess of $1 billion per year. We should have increased certainty on the timing of these regulations in the next six to nine months.

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. To serve this market, ADA Carbon Solutions, our joint venture with Energy Capital Partners, is making great progress on its new activated carbon processing and production facilities in Louisiana. In the second quarter, construction was completed on an AC processing plant in Natchitoches, Louisiana capable of processing up to 50 million pounds of AC per year. The plant has started up and is currently delivering product to existing contract customers and potential customers requesting truckloads to test.

Construction on the new AC manufacturing plant in Red River Parish, Louisiana began last September and appears to be on budget and on schedule to begin operations next spring. We are posting weekly construction pictures on our website so that you can track the progress. Funding of construction continues with equity provided by ADA and ECP. The resources provided by this partnership have given us the ability to keep the project on schedule as we wait for favorable debt financing opportunities.

The JV has already signed AC contracts for a third of the nameplate capacity of the plant for the first three -- first five years of production. There's an ongoing healthy market for AC for power plants, but because of the slow pace of procurement in this industry there have not been many contracts completed this year. Carbon Solutions is having follow up discussions on a number of bids that have been submitted this year and believe that several of these will result in supply contracts before the end of the year.

The next topic relates to our new business to provide our power generating customers with technology to capture carbon dioxide for coal based plants. Similar to mercury, we are seeing activities in Washington, DC that are creating business opportunities for ADA. Since our business model is based around using funding from DOE and customers to develop the technology to meet future regulations, both increased levels of funding and the threat of regulation are critical to our near-term revenue growth and long-term commercial markets. We are currently working on a contract to advance the development of our solid assortment based technology. This $3.2 million program is co-funded by DOE and several of the lead power generating such as ADP, Southern Company, Luminant, Amren and Xcel Energy. We are making progress on this technology and if you are interested in more details we provide copies of technical papers and presentations downloadable from our website.

There's also the possibility we might see increased regulatory certainty on this in the near future. In the second quarter a bill was passed in the House that was spearheaded by Congressmen Waxman and Markey requiring future reductions in carbon emissions from power plants. The bill is currently being discussed in the Senate where there are a number of hurdles to overcome and it must also compete with healthcare for attention.

In the near term we are seeing increased funding, federal funding opportunities for clean coal technology. The American Recovery and Reinvestment Act allocated $3.4 billion to support development demonstration of technology to capture and store carbon dioxide from coal fired power plants. In June DOE put out two solicitations with a total of $2.8 billion to support this activity. We were able to complete a proposal to scale up our technology that may eventually lead to approximately $100 million to $200 million in funding over the next few years to make advances towards commercial offering. DOE has stated that there's an urgency to get these projects moving quickly and is expected to announce winners in the fall.

Finally, let me update you on our refined coal product CyClean sold through Clean Coal Solutions, our joint venture with NexGen. We are in a stretch run with this product as it must be sold and implemented before the end of the year. The urgency of this deadline along with other factors such as the impact of the recession on electricity consumption, new emissions reductions regulations and pricing pressures on coal have created accelerated interest in activities with key customers. We also had one successful test in May and two more tests scheduled for this quarter.

Clean Coal is planning to put into operation several production facilities for refined coal and is presently in negotiations with several parties to that end. To meet the tight time schedule to get equipment fabricated and installed before year-end, Clean Coal has initiated staged purchase commitments to build several facilities, the estimated total 2009 capital expenditure for which is approximately $[22.6] million. In all -- if all the plant facilities are placed in service in time and the product qualifies for the tax credit, they will have the potential of producing profits for Clean Coal in excess of $20 million per year for up to 10 years. We have committed hardware for two of the facilities, and other commitments will be made during August and September. The decision to proceed on such facilities depends upon a number of factors and milestones that we are closely monitoring.

We are moving forward on these projects because of the huge financial upside for us, but recognize there are a number of uncertainties and risk factors including obtaining explicit guidance from the IRS, successfully demonstrating qualified emissions reductions, finalizing necessary contractual agreements, and completing construction and installation startup of such facilities prior to January 1, 2010. The IRS guidance which was originally to be announced by June 30th, 2009, now expected before the end of August, is key to securing and finalizing the final utility contracts. If Clean Coal succeeds in obtaining approval for the Section 45 tax credits and sells the facility to a third party, NexGen has a right to maintain its 50% interest by making additional payments to ADA that total $4 million commencing after Clean Coal receives such qualifications.

So let me summarize by stating we are excited about the growing markets for clean coal technology. We are making great progress with the construction of a very important asset for the Company with the AC plant. Our partnership with a well capitalized company like Energy Capital Partners has allowed the project to stay on schedule in difficult economic conditions while we await the right time to complete the debt financing. We will continue to execute on our aggressive business strategy and, as you can see, there are a number of uncertainties that will be resolving by year end. We believe that by successfully completing these near-term milestones the equity markets will eventually reward ADA shareholders with a valuation that reflects the Company's prospects of substantial earnings growth.

Thank you. Let me now open this up for your questions.

(Operator Instructions) Your first question comes from the line of Graham Mattison of Lazard Capital.

Hi. Good morning, guys. Just a question on the CyClean. So by the end of August we will get clarity in terms of whether or not it qualifies for the tax credit?

We know what the language is that came out of the bill and that's 20% NOX and with the correction that came in in the TARP bill, it's -- and 40% mercury. We know we can reach that but what the IRS then has to do is turn that into explicit guidance on how they define that. We have had a number of meetings with the IRS and Treasury and what they have verbally told us that gives us an indication of that is that it will take a one-time qualification. So once the product is qualified, it's qualified for all of its applications. So what we are waiting for is the written guidance that comes out and if it confirms that, then we can move forward on that. And so we are just waiting for that written guidance.

So the written guidance should come by the end of August?

It was promised by the end of June. The current promise is the end of August.

And then once you get the written guidance then do you have to run more tests to prove it?

Depending upon the specifics, it may already be proven. But we are planning these two tests in the fall, either one of which could be the defining test for the product.

And then assuming all of that, you get the right things, then it's good to go, then it's just a race to get them in the ground and signed up before the end of the year?

It's probably three or four parallel activities that we're all conducting ahead of time, expecting that guidance and that's what makes this so difficult that we are having to start the construction of the equipment ahead of time, so it's ready to be put in the ground. You have to go through the permitting. The contract negotiations are ongoing on a number of these and they are very complicated because each one of the facilities ends up being a separate JV in itself in which there are negotiations with -- between Clean Coal, the JV, the utility and a monetizing partner, too. So there's some pretty complicated contractual agreements that have to be put in place too.

Is there additional cash that you need to put into this project, or this --?

Yes. That's the $2.6 million in capital equipment that we will have to pay for the construction of the equipment, get it placed in service, but then once it's in service, it will be sold to a monetizer because the monetizer has to be the taxpayer and owner of the facility. But this year we will have to pay for the capital.

Will you definitely do -- when do you have to make the commitment on the capital? Is that -- can you wait until you get clarity from the --?

No. That's the difficulty. We have started the construction of the first two of these at risk and so it's a staged commitment as you go, so we committed some dollars in, I think, June. We will make a decision on the next two in August and the next two in September.

Got you. And then turning to the CO2 outlook, you had mentioned $200 -- $100 million to $200 million in revenues. What's the potential revenue contribution to ADA from that if that funding comes through?

That would be funding to ADA. It would be a contract, just like our mercury contracts we have had over the years. We would be the prime contractor on that and so all those revenues would flow through ADA.

Great. The timing in terms of when you think that might be kicking off? Probably sometime next year?

What deal we announced on this one, again, this is all stimulus money so their intent is to get this out quickly. So what they have told us and, whether this happens or not we will see, is that they will announce these by the end of their fiscal year, which is the end of September, get this first phase. These are two -- they are phased-in projects where the first phase for us would be about $3 million and we would see that in 2010 and then it would ramp up from there in a second phase.

But potentially in the next -- yes, by sometime this year you could be awarded a $200 million contract?

No, no. This is phased in where it's bid as two phases, and the first phase is this $3 million part to design the rest of the equipment. And then DOE at the end of that first phase, which will be through 2010, DOE would then decide to move forward on the construction and operation of that facility and that would kick in the second phase, which we think is going to be $100 million to $200 million.

That you guys would be the prime contractor on?

Yes.

Great. I'll jump back in queue. Thank you very much.

Your next question comes from the line of Al Kaschalk of Wedbush Morgan.

Good morning, guys. Mike or Mark, I wanted to see if you could help frame or quantify the expected cash outlay over the next six to 12 months with the number of moving parts that are going on here.

Yes. We do have a number of moving parts and we are monitoring those closely and so we have done most of these in a staged approach, Al, where we are able to make sure we have accomplished some milestones and feel secure about moving ahead. And as Mike mentioned, we are putting some amounts at risk, but these are to initiate the engineering and initial construction on a couple of these CyClean plants. We will be watching closely for the information out of the IRS and these other tests and how the negotiations move ahead in making decisions about those. We are, at this point, also negotiating a credit facility that will help us meet those needs if needed for the CyClean.

The other costs, ongoing costs, from operationally we are, except for the litigation costs, we are probably cash flow positive but with the litigation costs, those certainly are using up a portion of our working capital. But we feel that we have got adequate resources to meet the needs and address these opportunities.

Is there any way to -- I mean, if you adjust for one-timers like litigation, but as you're building out your business model here, what type of outflow should we expect or even, quote, model over the next six to 12 months? I'm not sure if it's a couple million dollars, if it's breakeven on cash flow. I'm not sure that's clear.

That's perhaps something we can discuss in another call, if you want to call after the call here, but I think certainly you'll see from what we have disclosed at this time, if you were to remove the legal and litigation costs there that we're cash flow positive and very near profitability there. We expect that to continue on.

On the preferred shares where you dipped below 50% in the quarter, is there any trigger or interest in moving that back up for consolidation or does it really not matter from a shareholder or from an operational perspective?

As we reported in the past, our expectation when the debt financing and final capital costs are in place for this first line of the facility there, we expect our interest in the first manufacturing facility here to be about 30% given the parameters of our agreements with ECP. And so, as we have noted in the past, we did not expect to continue to be consolidating those results. But we have opportunities in the second and future facilities which we expect given the progress in the federal regulations here to participate in those at a 50% level which would likely lead to consolidation of those if that was the case.

And then one just loose item to tie up. On terms of the off take agreements signed or to be signed in the second half of '09, can you talk a little bit about the dynamics with the costs to merger. Are there any price concessions or are you able to hold firm on pricing? What type of changes are taking place with the new agreements?

We are not seeing much change in pricing from our original contracts. Again, it's just slow. Probably the biggest change that we are seeing is that we are getting customers to come down to visit the plant. I was just down there two or three weeks ago and the pictures on the website just don't do it justice. It's an impressive facility and how much progress they are making. We have a customer down there, he sees it. He realized that everything he is hearing about this plant not being completed from our competitors is wrong, and they recognize what they are seeing is the future of activated carbon production in the US. So that really relieves them, so we just see that as very favorable of actually having a plant well on its way. We are involved in some negotiations.

The other key part is we -- this is now our second contract in which the utility had let us know that we were going to -- we had won the contract but we couldn't commit to the early deliveries because we were just starting up the interim facility and ended up not getting that contract. Well, that's how important this milestone of getting this Natchitoches facility up and running, is that that's no longer an issue for us. That's been running pretty successfully. In fact, we delivered over a million pounds in July and so that's up and operational. We have got inventory of the foreign carbon coming in, the raw material coming in. We have got inventory of the finished product so we are now no longer faced with any issues on meeting the early delivery parts of these contracts.

Okay. Thanks for the additional color. In terms of the activated carbon you have imported, is that higher or lower? Where is that at relative to your expectations and how should we think about it in the second half?

Not much change in that, Al. Again, that whole interim supply facility is pretty much a break even for us until we get production up and running in the spring from the Red River plant.

Your next question comes from the line of John Quealy of Canaccord Adams.

Hi, guys. Good morning. It's actually Mark Segal for John. I was just wondering if you could comment upon your expectations for Waxman and Markey to address multiple contaminants, specifically mercury as well?

I think there was just an announcement this week that Senators Carper and Alexander on the clean air subcommittee of the Environment of Public Works Committee announced that their intent is to put a 3P bill on that if it moves forward. So we are likely to see it. There's still, obviously, a lot of uncertainties around whether a climate bill will move forward in Congress, but it was their intention to submit that to Senator Boxer, who heads up the PW committee.

Okay. And then regarding the ongoing discussions surrounding the debt, is there a targeted level of production capacity that investors are targeting in order to get comfortable here? I think you said you're right around a third capacity right now.

That's not that much part of the discussions on the debt. Obviously, they are looking at the total market and what we committed and where we are in bidding on these, but it's really the financial conditions that's dictating that and when debt is starting to flow more than it is anything else.

Okay. And then can you just give us an update on the ongoing litigation?

The only updates are, been heavily into the discovery process, the Norit trial is scheduled for the 21st of September. The Calgon, I don't think there is a specific date but next spring, late next spring, I think.

Okay. And then just lastly going forward in terms of the G&A expense, should we look to model going forward higher legal-related expenses like we saw this quarter or will that tick down?

I think it's reasonable to expect those in the third quarter, but as Mike noted with trial date set for September 21st on the Norit matter, we would expect those to drop off significantly in the fourth quarter. And then the costs that we are incurring on the Calgon matter are considerably less so there's going to still be something in there, but not the bulk of the discovery in that matter appears to be taking place now. So those are costs that we will incur in the third and fourth quarter of this year but then should drop off next year until we get closer to a trial date.

All right. Great. Thanks so much.

Your next question comes from the line of Bill Burns of Johnson Rice.

Good morning, guys. Mark, I wanted to follow up on Mark's question about the litigation, just to be sure. Your P&L you reported this quarter, second quarter, is nonconsolidated, right?

That's correct.

And so the G&A expense of $3.5 million, the reason it's high is because of the $2 million won in litigation?

That's correct.

Okay. Just wanted to clarify that. That's all I had. Thanks, guys.

Your next question comes from the line of Dan Mannes of Avondale.

Good morning Mike and Mark. A couple of quick follow-up questions and just a confirmation. So the 30% of nameplate and again for nameplate are you using the 125, the 150 or the 175?

I would have to go back and look at the documents on that, Dan.

Okay. So the nameplate of the plant we will follow back up on?

Yes. Well, for that specific calculation.

Okay. Just next question, the run rate, you said you did a million pounds out of the interim facility in July. Is that reasonable? You have 3 million pounds a quarter for the back two quarters based on existing contracts or will that continue to ramp?

Could you restate that?

Sure. The expected sales volumes from the interim facility through the balance of the year, you said you did 2.1 in the second quarter, you did a million in July. So should we assume 3 million or so for the third and fourth quarter based on existing contracts or should it be ramping up even more than that?

I think what we announced previously is 15 million for the year.

Okay. And there's no change to that?

Yes, it's the same contracts. Now, their usage may change and that will dictate what that final number is.

Got it. And then given that rate and given your expectations for next year, in theory, could you support the existing contracts just out of the interim facility if you had to?

Yes.

Okay. Talking briefly about the bid situation, historically you've quoted a number of $500 million of bids. Is that still a good number or has that number moved around at all?

We recently looked at that number when we look at RFPs that are out there and RFPs that we call near term that we have talked to utilities that tell us that it's coming out. That number hasn't changed significantly.

But you said, so it's RFPs that are out and ones that you expect?

Yes, that we have been talking to customers and they have been promising the RFP and sometimes from promise to getting the RFP out could be several months.

But are there people who have demand in 2010 in January 1 that don't have RFPs out there?

I'd have to look through each one of those but yes there's some that wait for a significant amount of time so that when it finally does come out, it's a pretty tight schedule between when contract award is and the first deliveries start.

So that $500 million is primarily for demand, though. It started between now and the beginning of 2010 or would it also include some demand that would start after the beginning of 2010?

A lot of it is in 2010, so it's not necessarily before 2010, but a lot of that demand is in 2010.

But I mean does that include some of the 2011 and 2012 stuff like the Canadians and --

I think most of those are deliveries by 2011.

Okay. Got it. Briefly on CyClean, it's been a while since we've talked about this. The $20 million number, can you give us a two-second walk-through again and remind us how the economics of CyClean work?

There's no such thing as a two second discussion on anything having to do with CyClean. Basically this is for a particular customer and it's -- that burn Powder River Basin coal in a cyclone boiler. When we look at the universe of that, we look at the top 10 to 12 prospects. They are burning about 30 million tons and this is going to produce a $6 per ton tax credit so that's close to $200 million. We look at our top six, that number is close to $100 million, so there's a fair amount of money to split up. But it gets split up quite a few ways.

The monetizers get a piece. In most cases the utility will participate in it up to a 50% level. And so we are splitting that. So that's one of the incentives for moving quickly and that's one of the changes we have seen over the last few months is that because of the recession and the demand destruction created by this and relatively cool summers, we are a few million dollars a year at a plant may not have been that critical in the past, now it's much more important. So they are much more interested in that. So basically what we are looking down is a split that gets split a number of ways and we see if we get the six put in, then the JV will have essentially profits of greater than $20 million a year.

That's the JV. What you --

Yes, that's right, that's the clean -- there's two JVs. There are several JVs. There's the JV Clean Coal Solutions of which we are 50% owner in and that's the one I'm talking about.

So you would theoretically get 50% of the $20 million?

Exactly. Plus the $4 million payment from NexGen if they decide they wish to continue to maintain their 50%.

Got it. And then the last thing, just on CyClean. Historically, one of the drivers here, aside from the economics, was mercury control. Given the advancements on the activated carbon contracts especially in Illinois, did that reduce the aggregate market size or are you marketing to some of the same people who have already either considered or are using AC currently?

The economics here is what's driving it, Dan. Because originally it was -- our market may have been only in Illinois. And, yes, and so we can reduce their carbon usage significantly, as part of it, so that's one of the benefits the utility would see. But I would say that at least half of the people we are talking to are in states where mercury control is not part of their demand right now. So that would be a future benefit, but they are really looking at the economics that's available through the tax credit.

Got it. And then last thing, just a clarification on CO2. Just the structure. You're saying $100 million and $200 million. You referred to it as funding and then you also referred to it as revenue. How is that structured exactly? If it's like the old mercury deals, are these -- these are R&D contracts or you're basically at cost plus? How would this theoretically work out?

These would be almost identical to the mercury programs where it would be a contract from DOE in which we would be the prime contractor. Those are with government rates which are cost plus contracts. There would be some cost share requirements so we would look to sell other contracts directly with the utilities to help do part of the co-funding. So they would be very, very similar to the DOE work we have done over the last six or so years, only the numbers are bigger just because the costs for controlling CO2 is so much bigger than mercury.

But the ultimate benefit from you is primarily on the technology front? Would this have a material impact below the gross margin line or is this primarily covering the cost of doing it and whatever overhead you need to support it?

That's the same way we would have had you look at mercury too. You wouldn't invest in us on the DOE programs, you would invest in on what we gained from developing the technology. And we could not, as a small company, even consider entering a market for CO2 capture because it is just so big. Just to give you an idea on it, we are building this activated carbon plant and it's going to be about a $400 million facility. CO2 control at each power plant, at each operating unit at each power plant could be bigger than that number, so it's a huge, huge market. There's no way we could even consider in-house funding of R&D to develop a technology that's going to end up costing several hundred million dollars. So we are bringing in, as we have done in all of our businesses, large partners, large industry partners to help us develop the technology and our access to government funding to help fund that while it is pre-regulatory.

Understood and sorry just one last clarification on the timing. I was a little confused. I think this was your answer to Graham. So what actually is coming out in October of this year?

These programs, they are a two phase program, and what you do is you put in an explicit budget to design the plant and discuss how big the second phase will be. What they will award is these first phases and the first phase gets you in the game and that contract, if awarded to us, would result in about $3 million in revenue for 2010 in which, with our partner, a large engineering company, we would design the facility. And at the end of that we would submit a detailed budget for constructing it and that would end up being the basis for the follow-up contract to design and build it and operate it.

But the long and short of it is the actual October announcement would be for $3 million with the potential for more after it, depending on your success with the trial and all of the other competitors for money, or your success with the design and things like that?

Yes. The announcement that they put out, they expected to award maybe, I forget the specifics, it's like 10 or 12 of which they would expect six to eight of these to move forward. There's $1.4 billion in that solicitation. We believe it's going to be under-subscribed.

Interesting. Okay. Great. Thanks for that clarification.

Your next question comes from the line of Steve Santos of Royal Bank of Canada.

Good morning. Just one quick question. On this 3P bill, Mike, you mentioned that Carper Alexander bill, they are hoping to attach the 3P bill to the Waxman Markey bill if it goes forward, but in previous calls you had mentioned that if that bill gets stalled out for whatever reason, they may bring it forward independently. Do you still feel that is a likelihood if this cap and trade program does get stalled out in Congress?

Steve, I think it's a real possibility. I think what you're seeing, they haven't talked about that, but I think they are confident the climate bill will go through. The other thought is at this point they don't want to look at it as a competing bill with that because I think there's only enough energy in Congress to look at one emissions control bill. So right now the focus is primarily on moving the climate bill forward and attaching this as an amendment to it.

Don't you feel, based upon what we are -- actually what we are hearing, that this Waxman Markey may get sidelined for some period of time, possibly into 2010?

Yes, it could. The national debates in Washington are very, very public these days and you could tell it's not a very functional process.

So does that put federal regs on mercury on the sidelines? Do you see any acceleration of anybody putting forward some, even the EPA, I suppose, through MACT, but they have a -- EPA has a mandate to put something, some update out there, don't they?

Yes. The EPA part of this, Steve, is an absolute. They have to put out a regulation and what they have said, they have started a few weeks ago, they announced some additional data collection to support that activity because the mercury MACT goes beyond just mercury. It goes into all these hazardous air pollutants, it also expands beyond coal to oil fired boilers. What EPA announced is they need additional data to address those issues. So the issue around EPA MACT process is not if, but when. So that's going to happen and we hope to know what their timing is on putting out the draft regulation, hopefully in the next six months or so.

What we would like to see in Congress is that moving forward in addition to the MACT because it's possible that legislatively we can get a bill that has a lot of features in it that the MACT wouldn't. That would maybe credit early compliance. We see that, for example, in some of the states that have a 2015 regulation if they give incentive for early compliance. We are actually selling equipment today in a state that has a 2015 regulation. So we would much prefer seeing something happen in legislation but if that doesn't happen, then we will see a federal rule through the EPA process.

And I would anticipate that so many of these utilities that are holding back on making commitments might get a fire in their belly once they see those probabilities emerging, I would hope so at any rate.

We have seen that in the past. They need that certainty just because their rate structure is -- if there's a rule, they get to pass those costs through and if not, they are taking them on themselves. So a lot of the PUCs don't allow them to move forward on unless there is a rule. So there is definitely, this is a regulatory driven business and when there's a regulation, they comply with it absolute, and when there's not a regulation, although we are seeing one, at least one plant, that's doing it totally on a volunteer basis, we would not do much planning around a volunteer market here.

Just one other point. Are you continuing to see interest or growing interest coming out of the Canadian market?

Yes. A lot of the sales activity, both for the ACI Systems as well as activated carbon is with the Canadians.

And their deadline is well established so these should and are getting more and more urgent about it, do you think?

The best news about that is their timing better matches up with -- that we will be up and running at Red River. So we would be meeting all -- most if not all of the deliveries from Red River which is going to be much more profitable for us than these early deliveries from the interim facility.

And just one last point. The cost of the imported AC, has that risen as we have gone forward? You mentioned that it's pretty much of a breakeven proposition at this point, but has that risen due to tariffs or is it just additional demand coming from overseas?

It rose through tariffs so when we started this, when we first started buying and bidding on activated carbon, I think it goes into late 2008 and when we started this, we haven't seen much change in that, so we anticipated it to be high. When we started out our early deliveries, we were using a small facility in Murchison, Texas as well as some contract milling and that was more expensive. So now we have our facility up in Natchitoches running -- there's a picture of it on our web site, it's a pretty impressive facility. It also gives us access to rail and barge there so once we've got Red River coming up, we call it a processing and logistics facility. But that is much more economical for us and we've got control over everything so we are comfortable bidding contracts for deliveries out of that.

But you continue to anticipate a breakeven situation through this year until you get the Red River going?

It won't be highly profitable and, again, the other part of that, as you see, the unconsolidated economics coming out of the carbon facility is realizing that, right now we have maybe 20 plus employees. By the end of the year we may have 60. We are hiring all the operators now for the plant. So there's going to be some pretty high expenses on getting geared up for operation that won't be paid for until Red River is up and running. So we are not planning on seeing any positive earnings out of that JV [clean] -- of Carbon Solutions until Red River is up and running because it's taking on all of the additional expenses in building and gearing up to operate that plant.

Okay. Great. Thanks so much, Mike.

(Operator Instructions) Your next question comes from the line of Steve Krueger of Foresight Investments.

Good morning, Mike. As I understand it, the funding of the construction of the new plant in Louisiana has been done primarily or entirely through the equity contributions of yourself and ECP, and I gather that you're at or near the end of that equity capital. What happens going forward? Who is going to pay for the continued construction costs while you're waiting for the debt financing to be put into place?

Although ECP has no requirement to continue contributing and paying for those construction costs, they have stated that's their intention to do that. And so that's being done in a form that is not causing further dilution of us but it gives us access to the liquidity to complete construction of this plant.

Do you have a written agreement with them to that effect?

No. There is no commitment that requires them to do that. They are doing that because they know where we are on the financing, they know the market, they know the profitability here and they have got about $100 million into this already and so they have stated their intention to continue funding this.

And what? They will just take their money back out of the proceeds from debt financing?

We see it not changing the equity ownership.

And are their pockets deep enough to fund the whole thing? What happens if you're unable to put any debt financing into place for another six months?

They are a 3. -- $2.3 billion fund.

But how much of that is available?

There's not a limitation that we see of that being a problem.

You're saying that they have liquid assets sufficient to continue funding the construction for a number of months yet?

We see that as not being a limit to getting this plant built.

Okay. Thank you.

Your next question comes from the line of Charles Zwickel of Brown Kelleher.

Good morning, gentlemen. You talked about that equity percentage and I'm wondering where is it right now if we were at one point 50/50 and then there were some estimates of 30/70? If they continue to fund it, where do you expect we will be?

Charles, our expectation when the plant is finalized and we have the debt structure in that we are feeling confident that it will be available to us, that we expect to be at this 30/70 split. So that is our expectation and plan at this point.

Okay. Thank you.

Your next question comes from the line of Dan Mannes of Avondale.

Sorry. Quick follow-up on CyClean. Can you give us a little bit more color on the staging of the investment of the $2.6 million? And secondarily I think you mentioned a credit line being used to support it and I'm wondering what assets you have that are supporting the potential credit line?

The staging is twofold. If you look at just one system, there's decisions to start construction and so you're making commitments as you move forward over the next, if it's a three month process, to build the equipment, you're staging in your commitments month by month on that single piece of equipment. There are some components of that equipment that may not have to be purchased to get it operational to the end of the year so that gets phased in towards the end of the year. And then what we are doing is staging potentially up to six of these where the first two commitments have been made and started that three-month process and then in August we will look at where we are on the milestones and make that -- start that process for the next two and then another month later start that process on the next two. So the assets we have are future earnings from these.

So you would basically be using that as collateral for a loan to support the construction of it?

We are negotiating that right now.

Okay. And how much have you committed to date?

To date it's a few hundred thousand.

Got it. Thanks.

Your next question comes from the line of Charles Zwickel of Brown Kelleher.

Hello again. You've got potentially six of these now, you were talking about more of them. Will you have time if it goes through to do any more than the six on the clean coal?

It would be really, really difficult. Six would be kind of a home run for us. It's possible if -- and, again, these just have to be up and operational on the 31st of December. And then once they are operational, they are skid mounted. They could be moved to other sites later. So there's some flexibility. There's so much upside on each one of these. We don't want to be in a position that if there's another possibility, we can't. We would almost rather err on having an extra piece of equipment than having one that could have turned into a $2 million to $3 million a year earnings for 10 years. It's a two month pay back so we are trying to balance what we think is reasonable and what's achievable as we go through these next four to five months.

And are these six that you're doing the top six?

These are the most likely six, yes.

Oh, it's not by size, it's by --?

No. These are the ones that we feel that we have come to a position. All of these customers, I mean, this is a very small market. These are people we have been selling this product to for over three years, a number of negotiations. So once we know where we are in each one of those discussions, we can look at where we think the language can come from (inaudible) and decide we think this utility is interested enough. They are sitting down and negotiating term sheets with us. We will continue commitment of building that equipment.

The issue on size is interesting because one of the things it allows them to do is because it's skid mounted and moved, utilities again are very, very conservative, don't like to do anything new but this would allow them to put this in service on a smaller unit. The range of these cyclones could be burning anywhere from 1 million to 3 million tons a year. So they could put it on a smaller unit, satisfy the placed in service and once they are comfortable with it, move it to the larger one and triple the tax credits available from that. So that's always a possibility. So it's more important than just getting these placed in service by the end of the year than it is by making sure they are on the biggest units.

Okay. Thank you.

And there are no further questions. I will now turn the conference back to management.

I thank you for joining us today and your continued interest and investment in ADA. Goodbye.

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