Arq Inc (ARQ) 2010 Q1 法說會逐字稿

Good day everyone,and welcome to the ADA-ES Q1 2010 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 the listen-only mode.

This conference call contains forward-looking statements within the meaning of Section 21-E of the Securities Exchange Act of 1934, and 27-A of the Securities Act of 1933, which provide a Safe Harbor for such statements and certain circumstances. These statements are identified by words such as believe, will, hope, expect, anticipate, intend, and plan. The negative expressions of these words or words of similar meaning. Actually 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 section entitled Risk Factors in ADA-ES' Form 10-K.

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 filing with the Securities and Exchange Commission, or otherwise before deciding to invest in ADA-ES' securities. The forward-looking statements may during this conference call are presented as of May 13th, 2010, and ADA-ES disclaims any duty to update them, unless otherwise required by law to do so.

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

Thank you Eva. Good morning, everyone. And thank you for joining us for the ADA-ES first quarter 2010 conference call. First, I would 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 prospects. After that we will open the call for your questions.

Our reporting for the first quarter of last year was somewhat anomalous, as it included the consolidated results of ADA-ES Carbon Solutions, our LLC, our activated carbon or AC supply joint venture with Energy Capital Partners I LP and its affiliated funds. We deconsolidated Carbon Solutions commencing in the second quarter of last year, so our 2010 results report our equity interest in the JV in Other Income and Expense. Starting in the first quarter of 2010, we have also revised our segment reporting to more clearly communicate how management evaluates and measures the Company's lines of business. We now report three operating segments, Emission Control, or EC, CO2 capture, or CC, and Refined Coal, or RC. With those changes in mind, revenues amounted to $3.9 million for the quarter, as compared to $4.9 million in the 2009 quarter. With the 2009 amount including $390,000, or 8% of AC sales attributable to the now deconsolidated Carbon Solutions. The balance of the change is due to decreases in our EC segment, somewhat offset by more development work in our CC segment.

Revenues in 2010 for the EC segment were comprised of sales of ACI systems, 80% in the current period versus 62% in 2009. Flue gas chemical sales 3% versus 1% , and Consulting Services 17% versus 29%. For the quarter, our ACI system sales contributed approximately $2.5 million compared to $2.9 million in 2009. We had contracts in progress at quarter-end for supply of systems with remaining revenue approximately $3.3 million, $1.5 million of which we expect to complete and realize in the last three quarters of 2010, with the balance to be completed and realized in 2011.

We expect our EC segment revenues to decline until such time as utilities, cement plants, and industrial boilers start to react to the anticipated new Federal Emission Control regulations. We are starting to realize some increased demand for our flue gas chemicals, due to demonstrated interferences with Mercury capture caused by competing products, such as SO3 injection. Sales increased marginally in the first quarter by $29,000 as compared to the same period in 2009. Our Consulting revenues decreased approximately $800,000 during the first quarter of 2010, as we have completed nearly all of our Mercury-controlled demonstrations and analysis. We expect a continued reduction in Consulting revenues, although we have focused efforts on SOx and NOx control demonstrations and analysis, which have some growth potential.

Through our ACI operating division, we performed worked value at $528,000 related to refined coal systems provided to Clean Coal Solutions LLC, our joint venture with an affiliate of NexGen Resources Corp., that would also be recognized as revenue, but was eliminated in the consolidation of Clean Coal. Our DOE and industry consulting contract revenue totaled $803,000, representing an increase of $542,000, or 208% from 2009 revenues, from efforts in developing and testing solid sorbent technology for our CC segment. The remaining unentered amount of these contracts was $800,000 as of March 31st, 2010,all of which is expected to be recognized this year.

Gross margin was 35% for the first quarter in 2010, as compared to 42% in 2009, primarily as a result of decreased volume, as well as increased cost associated with preparing the refined coal units for routine operations. We expect overall gross margins for the EC and CC segments for fiscal year 2010 to be consistent with the levels achieved in fiscal year 2009. General and Administrative expenses increased by $1.4 million, or 44%, to $4.6 million, due primarily to costs related to our litigation with Norit Americas Inc. and Calgon Carbon Corporation. R&D expenses decreased $34,000, or 16%, as a result of reduced Mercury consulting activities. We anticipate that our future R&D expenses will grow in direct proportion to DOE-funded CO2 work we perform over the next several years.

Our net loss for the first quarter of $2.8 million, or $0.39 per share, includes a loss of $1.2 million, related to our equity interest in the net loss of Carbon Solutions, and an offset to the loss of $346,000 for NexGen's share of Clean Coal's consolidated loss. We expect Carbon Solutions to continue to have losses in 2010, as commercial operations are initiated, and other development activities continue this year. Cash flow used in operations was $986,000 for the quarter, compared to $2.1 million for the same period in 2009.

During the quarter, Arch Coal invested $1 million into ADA-ES through a purchase of our common stock, and we are negotiating a license agreement with them that we expect will result in a $2 million cash payment in the second quarter, and the possibility of future royalties. The Company's consolidated balance sheet as of March 31st, 2010, reports cash and cash equivalents of $2.1 million, and working capital of $2.6 million. We have no long-term debt, and shareholders' equity totaled $23.7 million at quarter-end.

Mike will discuss the status and progress in our other activities, and now I would like to turn the call over to him.

Thank you, Mark. Let me start with a quick update on regulations that would enhance the markets for our business. EPA continues to move forward on three different Maximum Achievable Control Technology, or MACT standards, that would increase the markets for Mercury control and other hazardous air pollutants.

First, the draft of the industrial boiler MACT was released two weeks ago by EPA. There will be 45 days for public comment, and then it will be finalized by the court-mandated deadline of December 16, 2010. As we analyze this new rule, we see a potential market for carbon injection for control of Mercury, as well as dioxins and furons. We estimate that this regulation would increase the market for ACI systems by several hundred, and the associated AC by 50 million to 100 million pounds of AC per year. Now that the industrial MACT has been released, we expect that the draft of the cement MACT will be released in the next few weeks, which is also scheduled to be finalized before year-end.

With regard to the utility MACT for coal-fired boilers, the EPA has announced that the draft will be released on March 2011, and finalized by November 2011. The Clean Air Act requires that all MACT regulations be met within 36 months. We are already receiving requests for proposals from our utility customers, to help them assess how they will comply with these expected new regulations. We believe these regulations are likely to create a number of opportunities for equipment and AC supply over the next four years.

On the equipment side of the business, we see the need for 600 to 800 ACI systems to be supplied between 2011 and 2014. Our goal would be to maintain our 30% market share, which will require rapid scale-up of our production capabilities. On the activated carbon side, we predict a significant gap between AC production and the demand starting in 2012. With the gap growing close to 1 billion pounds per year by 2015, this will require a significant expansion of AC production in the US, for which ADA Carbon Solutions, our joint venture with Energy Capital Partners is well-poised. Carbon Solutions is performing start-up procedures on the new AC manufacturing plant in Red River Parish, Louisiana, and plans to launch commercial operation later this month.

We are looking forward to the new era of AC production, and believe that the plant with its modern equipment, extensive emission controls, and energy efficiency will be a significant supplier to the AC market. We believe the growth we anticipate in the AC market will require as many as five additional AC production lines of the same size and capacity as Red River. The JV is well along in the permitting of these facilities in anticipation of Federal regulations, and we retain our right to participate up to 50% in capacity additions. We included a proposal in the Proxy of this year's Annual Meeting for shareholder approval of the issuance of 3.5 million shares to give the Company flexibility of raising capital over the next few years to take advantage of several growth opportunities, including this market.

Let me now update you on our refined coal product, CyClean, sold through Clean Coal Solutions, or Clean Coal, our joint venture with NexGen. Clean Coal successfully put two systems into service in December, meeting the year-end deadline set by the IRS, in order for the facilities to qualify for Section 45 tax credits. Clean Coal is preparing the CyClean equipment for efficient routine operation, finalizing contracts with the host utility, and negotiating long-term arrangements with monetizing. We expect completion on these fronts in June, at which time Clean Coal would sell the systems and receive up-front payments expected to total approximately $9 million. And start recognizing additional revenues as they begin making refined coal on a continuous basis for the next ten years.

These first two facilities, which are designed to produce a combined total of 6.5 tons of refined coal each year, are expected to generate net after tax cash flows of approximately $9 million per year for up to ten years. The accounting and reporting of revenues from the anticipated transaction will depend on the negotiated final documents, and may well follow expected cash flows, which is a different treatment than previously discussed. Although the prospects of these refined coal units are certainly very exciting, we believe there may very well be an opportunity to grow this business further.

The Senate really passed a second Jobs bill that contained a number of tax incentives that included a one year extension for Section 45 for refined coal. We are working with Congress to keep this provision in the final Bill, which would allow us to create jobs and reduce emissions. We are hearing that Congress hopes to have this jobs bill completed before the Memorial Day recess.

As we have reported in the past, we believe there are five or six potential customers that are viable candidates for our CyClean technology, if we receive an extension to the placed in service deadline. We have begun discussions with these potential customers, and their interest has increased, now that the number of technical, contractual and task risks have been reduced as a result of the IRS guidance, and CCS's first two systems having been successfully placed in service.

Switching topics, in the first quarter we announced an investment by Arch Coal as Mark mentioned earlier, the first part of the investment was the purchase of $1 million of ADA shares at market price. The second part of the investment is expected to be $2 million, paid by Arch for an exclusive license to a promising new technology for reducing certain emissions from coal. We have been working with Arch for a number of years towards developing coal, with an enhanced environmental performance that could be premium priced. We are finalizing the licensing agreement that would include a royalty stream for ADA to profit based on the success of the technology. We will announce the definitive agreement after it is signed by both companies.

The next topic relates to our new business to provide our power generating customers with technology to capture carbon dioxides in coal based plants. We are currently working on a contract to advance the development of our solid sorbent-based technology. The $3.2 million program is co-funded by DOE, as well as several elite power generators, including AEP. Southern Company, Luminant, Amaranth, and Xcel Energy.

In the first quarter, we began our initial field tests of the 1-kilowatt CO2 pilot plant at a Luminant site. The initial results in this field confirmed the promising results we have demonstrated in the laboratory. We are conducting additional field tests throughout the year at other sites. The next step in the scale-up toward commercialization will be to test the technology at a 1-megawatt scale. In December we submitted a $14 million proposal to DOE that includes co-funding from our customers in the power business.

DOE was not able to meet their original contract award date, and has not specified a new timeline for contract announcements. So we are waiting to hear the results of this competitive solicitation. We expect a determination of the award during the second quarter of 2010.

I will now summarize by reiterating we are optimistic about the growing markets for our clean coal technologies. In addition to the three business sectors I described, there are other emission control technologies, such as alternative flue gas conditioning, control of organic compounds with activated carbon, the control of sulphur trioxide, that are beginning to gain traction, stemming from progress on new regulations, and an overall improved environment for our business.

Before opening up for your questions, I would like to mention that we will be presenting at the Lazard Alternate Energy Summit on June 9th in New York City. We hope to see some of you there. Operator, please open up the call for questions.

(Operator Instructions). Please stand by for your first question. Our first question comes from Graham Mattison with Lazard Capital Markets. Please state your question. Hi, good morning, guys.

Good morning, Graham. Question on the CyClean. So in terms of the looking at the extenders. You are in discussions with five potential customers. Assuming that the extenders does get done by Memorial Day, will there be any problem getting those plants up in service? I guess the follow-on to that, is if our friends in DC take a little bit longer, goes to mid-summer with that, would there be a rush, or do you foresee any challenges in getting those new plants into service by December 31st?

It is always challenge. But we are moving forward as if that is going to happen. If we look back a year, where we were this time, we were expecting guidance from the IRS by the end of June. In July we started building equipment without that guidance. And that guidance didn't come until December and we were still able to get a couple in place.

So even if it extends out beyond Memorial Day, we will still be walking through the process, designing equipment, getting the equipment teed up for fabrication to meet the deadlines. But spending some money at risk until that happens. So it is probably going to look a lot like last year. But we are on a time schedule, which includes sales, design, fabrication and installation that gets us there before year-end, and it will just make it easier on the decisions on how many to build the sooner we hear from Congress. Okay. Great. And then on the CO2 consulting. The $14 million. So you expect to hear the award dates sometime this quarter? That is up in the air?

Yes. We expect to. In the past DOE has missed some of the deadlines, when they put out the RFP, they laid out a schedule of the RFPs were due in mid-December, and they wanted to get those in place by April. What you have got to realize is that a significant amount of additional CO2 capture work is ongoing at DOE with the infusion of monies from the Stimulus program last year. And there hasn't been a lot of expansion of personnel there. So it is just a matter of going through the process. They have not told us a deadline, but just from conversations of what we are hearing, we think it is going to happen in the second quarter. The program is still on, it is just they are moving the date of when they announce it?

Yes. It just takes them time to go through the reviews, to review the proposals, select the winners and start the contracting. All right. Great. I will jump back in queue. Thank you very much.

Our next question comes from the line of Al Kaschalk with Wedbush Securities. Please go ahead.

Just wanted to follow-up on the extenders question. How much capital are you needing to spend or will spend as this risk/reward looks favorable at the moment?

Well each system runs $1 million or $2 million to the joint venture. But that is an expenditure that ramps up through the end of the year. And it starts out with lower cost efforts, the lower cost efforts being the sales and marketing, the design of the equipment, and it gets more expensive once you turn on the fabrication. So over the next six to nine months, we would be looking at ramping that up with the heaviest expenditures occurring in the fall.

And is it fair to think about five or six customers, how many facilities per customer that would be, is that one or two, or how do we--?

We are looking to put in potentially four or five systems. And that would generate upwards of another 20 million to 25 million tons of refined coal.

Okay. On the CyClean part, it sounded like there is still a bit of uncertainty on the accounting, or was anticipated. Is that a fair read on the prepared remarks?

Yes, Al, this is Mark. Yes. I think we are finding as we look at getting into some negotiation on contracts and talking about that, there are a couple different tracks that the transaction may take, a lease versus a sale of the equipment. And as we look at what other components of the services we are providing and other things, we are analyzing that the proper accounting for that, and so as we may have expected a sale that would result in a significant up-front revenue recognition, as we are analyzing now, it appears that may be more appropriate given what we are seeing in likely agreements, that the accounting revenue recognition may more closely follow the cash flow expectation. Which we think is a better result here from a reporting standpoint, rather than having a big lump of something up front. But would be spreading this over what we expect the ten-year period of this to be. So we continue to analyze that. It will be based upon the final documentation that is signed when these things get put into routine operations.

So how would you suggest that we think about this, given that you really don't provide sort of an outlook for revenue numbers? To me it sounds like the $9 million up-front payment could be 9 over 10, which would be about $1 million a year. Which is the difference?

What I can says is we expect to be providing some additional guidance and more detailed guidance on this when we finalize the transaction. And our target for that is in June at this point in time. So we will continue that. But we will be providing some more guidance on the expected revenue recognition and how this plays out over the term of expected production.

Are you hearing more directed for Mark, is the negotiation process improving from your perspective? Is it more beneficial? Is it still a challenge? What is the update there?

Well, the change you are hearing is that when we reported last quarter, we had multiple parallel discussions with monetizers. We are moving forward negotiating a single contract at this point. So it has eliminated some of the different possibilities, and based on moving forward with a single player, the auditors look at what that contract might look at, and they are giving us different guidance than before when there were a lot more degrees of freedom in that.

So as Mark mentioned, as this gets closer, we finalize this agreement. At that point we will be able to give you a pretty good definition of this is what that first sale is going to look like, from both a cash standpoint and from a reporting standpoint, and then it is going to be pretty easy. It is going to be a revenue recognition as we produce our refined coal and that is going to be pretty flat over the next ten years.

And then finally is there any update on loan guaranteed program as it relates to the facility?

No. No new information on that. DOE is still in the process of going through their final analysis. I think all of the reports from the various independent contractors that were hired for them to review the market, the technical engineering, and legal aspects. So hopefully that will continue on and get completed here shortly.

Our next question comes from Veny Aleksandrov with Pritchard Capital Partners. Please state your question.

Good morning, Mike and Mark. I have a question on the ACI systems side. You said that you had $3.3 million of contracts. How much do you have in the bidding pipeline, and without further regulations, how many more systems are needed there?

Veny, the initial market for the state programs is pretty well done. So we kind of look at the ACI equipment by itself as having a wave that is pretty much coming to completion now. And a much larger wave four or five times bigger starting in 2011 and 2012. So there are only a few out there being bid, and most of those are related to new power plants, as they come online.

What we are seeing coming in addition to that is, for example, the potential bids in the cement and in the industrial boiler market for smaller pieces of equipment, because these are smaller units, and so our ACI equipment group is working on designs and preparation for supplying a different set of equipment for those units. And what is also filling in this time, we are seeing interest in our flue gas conditioning, for enhancing mercury control at the existing units, and SO3 control, all of these will be producing some equipment revenues for us this year, until that next wave of activated carbon injection bids builds up from the Federal rules.

Thank you. And my second question, if you can, give us an update on the lawsuit that you are involved in, and the second part of the question, SG&A expenses were high this quarter, you stated why. But you if you take the expenses related to the lawsuits out, what do you think a normalized level for the rest of the year is going to be?

Well, there is no update on the lawsuits, but the Calgon suit, we are looking forward to going to trial in July. And the Norit lawsuit is scheduled for arbitration. We are unable to schedule the three judges' availability until October. So there is not much happening on those until those go to, we get those completed this year. Mark, do you want to take the other question?

Yes. I think, Veny, that the way to look at that for your modeling purposes would be to look at the level of the G&A expenses, and on an ongoing basis, take those legal costs out, and that would be a level that we would expect to continue on.

Okay. Thank you so much.

Thank you.

Our next question comes from John Quealy with Canaccord. Please state your question.

Good morning, guys. It is Mark Segal for John. Just focusing on refined coal. For the existing systems that are in place today, what does your off take visibility look like? And are those agreements structured at a fixed or variable price, or how should we think about that?

Mark, these systems are intended to shadow the utilities at which they are placed at. So as we look at producing the refined coal, we are going to be treating and producing refined coal up to the capacity of what the utility that they are placed at is burning. So it will be very much dependent upon their coal usagein these cases, because it is not just the tax credits and cash flows to us that are generated, but we have significant, these emission reductions that are achieved through the process here and that is of particular interest to the utilities there.

So they look at, or these cyclone boilers, treating all of the coal that goes into those cyclone boilers. Generally in the contracts that we are negotiating, there is a fixed price that we will look to receive based upon a discount to the tax credit that is generated from the production of that refined coal. For 2009 that was $6.20 per ton, and that is escalated by some Federal factors over the ten-year period. But generally that will be a fixed discount, or a percent of that tax credit that is generated.

Okay. That is helpful. And then just turning to ADA-CS for a second. Just returning to the commentary in the press release about potential RFPs out there. Can you just give us an update on what you are seeing, what the pipeline looks like right now, both from a size or contract duration standpoint?And are utilities growing more comfortable now that the plant is close to commercial operation?

That has certainly helped, getting closer to completion to the plant. In some cases we had not been able to bid until we can produce the product from the plant, in order for them to test. So the pipeline that we see, there are a couple parts. One is some replacement as some of these earlier state programs have come into place, some of those contracts are coming out for bid.

There are a few large new power plants that are coming online over the next couple of years that are out for bid for contracts. And these could be volumes of 10 million to 20 million pounds apiece per year. Pretty significant opportunities on those units. And the rest is related to probably our ability to enter into the water market, once we are able to start producing activated carbon, and can qualify our activated carbon for those uses.

Okay. And my final question. What sort of system adjustments need to be made to the legacy ACI systems in order to service the industrial boiler market and the cement kiln market, and how far along is that work?

Well, it is mainly, in some cases it is a total, somewhat of a redesign. And basically the problem is that the injection equipment is the one piece that doesn't scale down. So, for example, on the activated carbon usage, if you look at 100-megawatt and a 500-megawatt power plant, the 500-megawatt power plant will use five tons as much carbon as the 100. But they will both need the same equipment, which will be about $1 million. If you look at the industrial boiler MACT, it is going down to regulating boilers as small as 1-megawatt.

And so obviously the activated carbon usage will scale down, but they can't afford a $1 million piece of equipment. So we have got designs. We will be spending some money on finalizing, commercializing designs related to what can be done to simplify the equipment to these smaller demands. And that is on the industrial boilers, some of the industrial boilers will be significant sized. But it is the distribution of sizes that is going to require some additional design.

The cement kilns are almost to the same scale of the utility boilers. So that won't take much design. But they are also much more cost constrained. They don't have the luxury of being able to recover their costs through their rate bases. And so they are looking for a system with less bells and whistles on it. So that will be an easier redesign for that application.

Okay. Very helpful. Thanks a lot.

(Operator Instructions). Please standby for your next question. (Operator Instructions). Your next question comes from Daniel Mannes with Avondale Partners. Please state your question.

Good morning. A couple of follow-up questions. First, just to make sure I understand on SG&A. I don't think you said in your press release exactly what the litigation expense was in the quarter. Was that sort of the entire $1 million and change difference?

Yes. The significant legal expenses relate to the arbitration that is ongoing on the Norit Americas matter, and then in the Calgon matter, as Mike mentioned, we are scheduled for a July trial date. There were expert witness testimony costs and some other filing of summary motions, and things like, that occurred at that time, that added to that as well. It is these two litigation matters that are adding significantly to the SG&A.

Got it. So on a run rate, going back to that three and change number is not unrealistic?

That is right.

Got it. And in terms of the litigation costs and I think it is for Norit, I don't know if it is for Calgon as well. My understanding is that from a cash perspective, that is being picked up at the JV level, and then you have an accrued liability to them? When does that get settled, when and how does that get settled out?

That is correct. For the treatment on that, we believe that we will be in a position to settle that up and resolve that when the arbitration is resolved by the end of this year.

But I mean assuming no cash proceeds from either of these, does that mean you will owe the JV money, or are you assuming that obviously you feel strongly in both matters, where you will recover cash and be able to recoup the JV that way?

We are accruing on our obligation as you noted for these indemnity costs related to the Norit matter, so that is showing up as a liability. The resolution of that will very much depend upon the resolution of the arbitration.

Got it. Briefly on CO2. Can you give us any color on the margin on the CO2 side? It looks like there are pretty substantial margins. Given this is DOE work, how should we think about that going forward?

Yes. The margins shown in the first quarter for our CC, or the CO2 capture section, were somewhat anomalous as there was the budget periods for the contract did not line up with the fiscal quarter period. So we crossed over the year-end period, but had the budget period for the contract ended in February, as an example. So there were some dollars that were available where we had accrued costs that related to work that were covered by that phase, but that we were up able to bill to the government until the end of February timeframe.

What we have seen typically with the labor component of the CO2 work, and other consulting work for this, we have a gross margin number around 40%. As we start to add equipment components of that, which the further CO2 work is expected to have some significant components of, the margins on the equipment portion will be less than that as we don't add all of our overhead on those factors. But so as long as the work done is primarily labor charges, our margins on that range in this 30% to 40%.

Got it. And then last thing on the tax extenders. The commentary on the extenders, is the concern that no extender bill gets passed, or is the concern potentially that an extender bill gets passed, or sorry, a jobs bill gets passed without the extenders?Or is it possibly that your specific refined coal credit could be excluded? I guess I am just trying to understand the range of outcomes here?

Well, we need a Bill to get passed with our provision in it.

Sure.

So that is the goal. So those are two different parts of it. If the bill doesn't get passed with the tax extenders, that is a possibility. We were hearing that this is a high priority. I think Pelosi has announced she wants to get this done by Memorial Day. But it may not get done by Memorial Day. Our provision is not strong enough to push this. So it is really just a small piece of a larger bill. And that larger bill has a number of other components that are going to drive that.

So I think that is going to happen at some time. It has got the unemployment benefits in it, which have expired, that have to go on. So we think at some point there will be all of these tax extenders covered. So the bigger issue is probably is our Bill going to be in it, and just as it has probably in the original 2004 bill, and in the two changes that we saw over the last couple years, where we have had to get some changes on the refined coal aspects is, anything with coal is not very popular in the House, on the House Ways and Means, who is handling this. But coal is strongly supported on the Senate side.

So as this gets bounced back and forth, the original House bill did not have refined coal in it. The Senate put it in and passed it. It is back to the House. The House may take it out, send it back to the Senate, where we think we have got support to keep it in. So it is a very, very small piece of that Bill. We feel comfortable with our support in the Senate. We don't feel as comfortable about our support in the House on that.

That is really good color. The last thing on the refined coal, when you talk about placed in service, from a definitional perspective and given the fact that you are now in May and you are still making some adjustments to the underlying equipment. What sort of qualified it as placed in service in that time, as of year-end? And obviously you have learned a lot from that. Hopefully that will make it even easier for this year if you are able to do that, and get the tax support.

Yes. The placed in service is , it has got a little bit of an engineering component, but it is mostly something that is meaningful to tax lawyers. And so they kind of define what we have to do to operate it, to satisfy the requirements of that, and that goes back to a lot of not just this bill, but a number of different issues where placed in service is used as part of a tax-related business. So that's defined by the accountants and the tax lawyers. And we essentially from the technical side, get it up and operating and producing refined coal at a rate sufficient to qualified, or at a rate that will be more than what we expect the plant to use.

Okay. Because it sounded like you were still making you adjustments to it to get it to full-run operations?

Yes. Yes, we are making some equipment changes too, so they can operate as smooth as possible over the next ten years. Obviously when you are putting something in place to meet a requirement that has got a very tight deadline, you get it up and operating. And it may not be the most efficient operation. But it meets all the requirements. So now when the process of getting it ready for smooth operation for a ten-year period.

At the same time, I think there was some misunderstanding thinking we would see some revenues in first quarter from this. But until we get the contract finalized with the monetizer, we do not want to operate. Because operation requires hiring the labor, it requires paying for the chemical. And without the monetizer, we can't recognize revenue from that. So that is why the changes to the equipment are being done in parallel with the finalizing of the agreement with the monetizer, and we can't run without both of those happening. So it is kind of all coming together in a closing of agreements and equipment readiness that we expect to happen in June.

Got it. That is good color. Thanks, Mike.

Our next question comes from Corey Amon, Rice Voelker, please state your question.

Hey, sorry. It is actually Ben Joseph in. I was wondering if you have the ability to produce granular activated carbon at your carbon solutions plant?

Well, granular carbon is produced. And what we do is we mill it to powder.

Okay. So you expect to pursue the granular market?

Well, that will be a decision based on the sales that we will have in the mercury market where we see that. It may take a little additional equipment to provide some hardening of the granular material. So it is not a significant capital increase to do that. So it would just be a market call on whether we are going to do that or not.

Okay. And then I may have missed this. But as far as contract to capacity. Have you guys stated that on this call?

Well, what we stated in the past, we expected when we start up, we would be about 40%.

And that is still where you are today?

With what we have announced, yes.

Okay. That is it.

Our next question comes from [Steve Santos] with RBC. Please state your question.

Good morning, fellows. Just a couple of quickies. Are you seeing stability in the price of the activated carbon out in the market? I know it is somewhat early relative to the production schedule of the plant. But are you maintaining stability and what kind of margins when you get to that critical production mass, however long down the road might you see market?

The pricing, Steve, we saw an increase in price in 2007 before we entered the market. Just talking in terms of the brominated product we saw pricing well in excess of $1 for that. Then once the clean air mercury rule was thrown out, and the Pennsylvania rule fell with it, the demand decreased somewhat. We saw pricing for that more in the $0.75 area. And that is kind of where we had built our economics around.

We had announced previously margins that at that kind of pricing, we could be producing at EBITDA margins of 60% to 70% at full capacity. We think once these new rules start kicking in, and we get back to a point that the supply is greater, the demand is greater than supply, we expect to see that pricing go up even above that. But it has been pretty stable at that $0.75 pricing for the last year or so.

So it is hard to anticipate what it will be like in 2011, 2012 when you anticipate the demand?

We kind of look at the back being, going back to what it was like in 2007, when there was greater demand because of the regulations in place at that time.

Okay. Good. Secondly, just for us layman among the group, Mark, could you explain this $9 million up-front payment on the CyClean product?

Yes. And it is really kind of a cash payment that we are requiring and seeking in our negotiations with the monetizers to get into the deal. So it is that up-front payment helps cover costs in the equipment that we have put into place. And likely will be as you look at the structure of that, it gets amortized over some portion of the ten-year term. Probably not the full ten years, it is probably some initial portion of that. But it is kind of the up-front, it is the down payment that you make to get into the deal. So that is made and then the future payments are based upon the refined tax, coal tax credits that are generated.

And that comes from the utilities, the utilities that you are contracting with?

No. That comes from the monetizers. So it comes from the entity that will be receiving the benefit from the tax credits.

Okay. Okay. Very good. Thanks very much.

(Operator Instructions). Our next question comes from [Steve Krueger] with Foresight. Please state your question.

Good morning, guys. I have been seeing reports of significant numbers of utilities announcing plans to convert from coal to natural gas. Can you comment on how that might affect the market for the activated carbon systems?

Well, what you are seeing is announcements around a few plants here and few plants there, out of 1,200. And in some cases these are older plants, part of an agreement with a state. So what we see over the next few decades is that coal will continue to be a supply of 50% of the electrical power in the US.

So it sounds like the short answer, Mike, is that you don't see this conversion creating any material effect on your markets?

No.

Okay. Thank you.

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

Thank you everyone for joining us today. And for your continued interest in ADA.

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