Arq Inc (ARQ) 2010 Q2 法說會逐字稿

Good day, everyone and welcome to the ADA-ES Q2 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 a listen-only mode.

This conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and 27A of the Securities Act of 1933, which provide a Safe Harbor for such statements in certain circumstances. These statements are identified by words such as believe, will, hope, expect, anticipate, intend, and plan, the negative expression 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 the 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 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 them unless otherwise required to do so by law.

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 ADA-ES 2nd quarter 2010 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 prospects. After that we will open the call for your questions.

As mentioned in our call for the first quarter commencing in 2010, we have revised our segment reporting to more clearly communicate how management evaluates and measures the Company's lines of business. We now are reporting three operating segments; emission control or EC, CO2 capture or CC, and refined coal or RC. With those changes in mind, revenues amounted to $1.9 million for the quarter as compared to $4.8 million in the 2009 quarter. The change is due to decreases in our EC segment offset somewhat by more development work in our CC segment.

Considerable work for the refined coal facilities was accomplished during the 2nd quarter but the related internal revenues are eliminated in consolidation. Revenues for the 2nd quarter for 2010 in the EC segment were comprised of sales of ACI systems, 70% in the current quarter versus 65% in 2009, flue gas chemical sales 3% versus 2%, and consulting services, 27% versus 33%. For the quarter, our ACI system sales contributed approximately $1.1 million compared to $2.9 million in 2009. We have contracts in progress at quarter end for supply of systems with remaining revenue of approximately $2.3 million, $400,000 of which we expect to complete and realize in the remaining 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 the industrial boilers start to react to the anticipated new federal emission control regulations. Our consulting revenues decreased approximately $1.1 million during the 2nd quarter of 2010, as we have completed nearly all of our mercury control 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 CC segment, as mentioned before, we performed work in the 2nd quarter related to the RC systems provided to Clean Coal Solutions LLC, our joint venture with an affiliate of NexGen Resources Corporation. These were valued at $2.7 million and that would otherwise have been recognized as revenue, but were eliminated in the consolidation of Clean Coal. At the end of the 2nd quarter, Clean Coal completed transactions for the lease of its two refined coal facilities and received a nonrefundable advance payment of rent totaling $9 million. Income from the advance will be spread over the next 10 calendar quarters, which represent the initial term of the lease, and will be combined with other rental payments expected to be received based on operations at the facilities starting in the 3rd quarter of this year.

Our DOE CO2 and related industry consulting contract revenues totaled $337,000, representing an increase of $55,000 or 20% from a 2009 level, from efforts in developing and testing solid sorbent technology for our CC segment. As at June 30, 2010, we had DOE contracts in progress totaling approximately $500,000, all of which is expected to be recognized in 2010. As we recently announced, we have received notification from the DOE concerning our $14 million, which amount includes some cost share participants, Phase II proposal for CO2 capture work. We expect to start seeing revenues from those activities in the 4th quarter of this year. The 39-month program is expected to generate significant revenues for the Company through 2013.

Overall gross margins were less than 1% for the 2nd quarter of 2010 as compared to 38% in 2009, primarily as a result of decreased volume as well as increased cost associated with preparing the refined coal units for routine operation. We expect gross margin for the EC and CC segments for fiscal year 2010 to be consistent with the levels achieved in fiscal 2009.

General and administrative expenses increased by $2.7 million or 77% in the quarter to $10.8 million on a year-to-date basis, primarily due to costs related to our legal proceedings with Norit Americas, Inc. and Calgon Carbon Corporation. The trial on the Calgon matter was held in July and the jury awarded the Company a total of $12 million in damages for breach of contract by Calgon. Calgon has stated their intent to appeal the verdict. We anticipate recognizing revenue from the damage award when payment is received from Calgon.

R&D expenses increased $146,000 or 79% for the quarter to $539,000 on a year-to-date basis, as a result of continued refined coal in CO2 activities. We anticipate that our future R&D expenses will grow in direct proportion to DOE-funded CO2 work and future RC activities we perform over the next several years. Our net loss for the 2nd quarter of $3.7 million or $0.50 per share included a loss of $1.5 million, related to our equity interest in the net loss of Carbon Solutions and an offset to that loss of $670,000 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.

In addition, as a result of the lease of the refined coal facilities at the end of June, NexGen delivered to us their promissory notes totaling $1.8 million, which were recorded as other income as partial payment of up to $4 million they must pay us to maintain their 50% interest in Clean Coal. We expect the balance of $2.2 million to be paid through 2012, which payments we also expect to record as other income as they become due.

Cash flow provided by operations was $10.1 million for the quarter compared to cash used of $1.1 million for the same period of 2009. During the quarter, Arch Coal paid us $2 million for an exclusive license and development agreement for a technology to treat their PRB coal to reduce emissions with the possibility of future royalties.

The Company's consolidated balance sheet as of June 30, 2010, reports cash and cash equivalents of $7 million and working capital, excluding deferred revenues, of approximately $5.7 million. We have no long-term debt and ADA's shareholders' equity totaled $19.7 million at quarter end.

Mike will discuss the status and progress in our other activities, and now I'd 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 or HAPs

First, the draft of the industrial boiler MACT which was released by EPA in late April is currently out for public comment and is expected to be finalized by the court-mandated deadline of December 16, 2010. The MACT for cement kilns was finalized earlier this week and will require cement plants to reduce HAPs by 2013, including 92% of the mercury and 83% of the total hydrocarbons.

As we analyze both of these new rules, we see potential markets for activated carbon injection, or ACI, for control of mercury as well as organics and hydrocarbons. We are in contract negotiations with three cement companies for testing ACI. We are also in discussions with companies that own and operate a number of industrial boilers. With regard to the utility MACT for coal-fired boilers, EPA has announced that the draft will be released in March 2011 and will be final by November 2011. The Clean Air Act requires that all MACT regulations be met within 36 months.

Many power companies recognize the urgency of these pending regulations and, as a result, we already have contracts or are in negotiations for contracts with seven different power companies to evaluate ACI at a number of their plants. These not only represent up to $2.5 million in near-term consulting revenues, they put us in close contact with companies that will soon be purchasing ACI equipment and signing long-term contracts for AC.

We believe these regulations are likely to create a number of opportunities for equipment and AC supply in the next four years. On the equipment side of the business, we see a need for 600 to 800 ACI systems to be supplied to during 2011 to 2014. Our goal would be to maintain our 30% market share which would require rapid scale-up of our production capabilities.

On the activated carbon side, we predict a significant gap between AC production and 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.

Let me give you a quick status report on operations at the AC production plant built and operated by ADA Carbon Solutions. The AC manufacturing plant located in Red River Parish, Louisiana has been going through start procedures for the past several weeks. We have two furnaces operating and plan to begin on the third and fourth furnaces in a few months. We began shipping Red River product to some customers in July and, as interim inventories are depleted, we will shift all deliveries to Red River production.

The start-up team reports that this has been a fairly standard startup for a large greenfield plant and we're planning to be fully operational in the fall. There's been a great team effort getting the plant designed, financed, built and now operating.

The next topic is the exclusive development and licensing agreement we signed with Arch Coal in June for a promising ADA technology, aimed at reducing combustion-related emissions of mercury and other metals from PRB coal. ADA received an upfront payment of $2 million and the agreement includes a structure for royalty payments that could amount to as much as $1 per ton of PRB sold by Arch, depending upon the successful implementation of the technology and Arch's future sales of the resulting enhanced coal product.

ADA has been working with Arch since 2004 to explore certain unique characteristics of some types of coals mined by Arch that allow them to be burned with lower emissions. A recent technical breakthrough offers the potential to offer similar performance improvements from Arch's PRB coals. Arch currently produces more than 100 million tons of PRB coal per year. Now that the agreement is in place, we will begin working together to demonstrate the technology and, assuming that it is successful, begin marketing the enhanced coal. The new technology will be complementary to our other innovative technologies, such as CyClean, Flue Gas Conditioning and AC injection systems that enable us to help our power-generating customers meet the challenges of existing and pending emission control regulations.

I will now update you on our refined coal product, CyClean, which is sold through Clean Coal Solutions, or Clean Coal, our 50/50 joint venture with NexGen. Clean Coal successfully put in two systems into service in December of last year, thereby meeting the year-end deadline set by the IRS for production of refined coal from the facilities to qualify for Section 45 tax credits. By late June we announced we had completed all contractual technical activities necessary to begin producing and selling refined coal on a continuous basis.

The revenues are expected to be uneven during the first few months, as the new operators deal with startup issues with the new equipment. However, once issues are resolved and plants begin supplying refined coal for four generating units, these first two systems are expected to produce approximately 6 million tons of refined coal annually, qualifying for the approximately $6.20 per ton federal tax credit over the next 10 years. These tax credits are being monetized through a leasing agreement with a large financial institution that included a $9 million cash payment to Clean Coal for prepaid rent and includes, in addition, future fixed and contingent rent payments that are expected to generate a total of approximately $2 per ton of operating income to Clean Coal over the terms of leases.

The completion of these transactions also triggers up to $4 million in payments by NexGen to ADA for NexGen to maintain its 50% ownership in Clean Coal, which is being paid out in cash distributions payable to NexGen from Clean Coal.

The next item relates to our newest technology development which is intended to provide our power-generating customers with technology to capture carbon dioxide from coal-based power plants. As Mark previously mentioned, last month we announced that we were selected by the Department of Energy to negotiate a Phase II contract for a clean coal technology project to capture carbon dioxide from coal-fired plants. We expect to be the prime contractor for this $14 million, 39-month project that will be administered by DOE's National Energy Technology Laboratory, NETL, which is providing $11.1 million of the funding.

We expect another $3 million in co-funding and support for the project from several major utility companies, including American Electric Power, Luminant, DTE Energy, as well as the Electric Power Research Institute. The designated project team includes KBR, which we expect to provide engineering and equipment design expertise to develop the full-scale process engineering. This project fits into our business plan of using funding from DOE and our customers to develop technology for future markets.

The project, which is expected to start in 4th quarter, will provide funding to advance our commercialization plan for this regenerable, solid sorbent technology from the 1 kilowatt to the 1 megawatt level. Once expected commercial market from climate change legislation, we expect to profit from the production and sale of proprietary solid sorbents that are key to this promising energy-efficient technology.

Finally, let me briefly mention the lawsuits that have been filed against ADA by the country's two largest producers of [same] activated carbon, Calgon and Norit. In July, we successfully defended the suit brought against us by Calgon Carbon and the jury awarded ADA $12 million in damages. As Calgon has announced their intention to appeal the verdict, we do not know when we are likely to receive and record these revenues. However, we do know that the final payoff will include interest accumulated during the appeal process at approximately 6%.

The Norit suit is still scheduled to be heard by a three-judge arbitration panel this October. We are looking forward to getting past these distractions of these lawsuits so we can focus our energies on the tremendous growth opportunities ahead for the Company.

Before we open up the call for questions, I'd like to point out that Mark and I will be presenting at the Wedbush Clean Tech and Energy Growth Conference in San Francisco on September 14, and the Ardour Capital Energy Conference in New York on September 16 and 17. We hope to see you there.

Operator, we can now open up the call for questions.

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

Hi, good morning, guys.

Good morning.

I was wondering if you could just comment on your consulting activity and perhaps compare the level of activity you are seeing now in terms of opportunities versus a year, maybe six months ago?

This -- I think it was zero six months ago in this area. It was kind of closing up areas -- as far as mercury, we're seeing growth in two areas in this area. One is on a non-regulated pollutant, which is sulphur trioxide, SO3, generated from NOx control systems, SCRs and so that's been growing over time. We're starting to see more interest in that, from the problems produced by that, and this is again a non-regulatory driven program.

But on the mercury, basically all of the interest around mercury control kind of waned as the state programs were implemented. ACI systems were put in at 150 systems, and that kind of waned. But over the last three or four months, as the -- it almost came out with the -- around the timing of the first MACT for the industrial boilers, the -- several of the utilities started saying that the likelihood that the Federal utility MACT is going to come out, and this three years of time is going to be a very tight time schedule for them to figure out how they're going to get 90% across their fleet.

So it just seemed like almost instantly we started seeing a number of interests. So this is -- I guess that we're potentially working -- we've got contracts. We are close to contract on up to seven different utilities of doing ACI demonstrations on a number of them. We think that's going to pick up additional speed as we get closer to that March deadline.

And of the seven companies you're working with, is there a sense of how many boilers that could potentially be for?

Well, I'd have to pull it out of the top of my head, but I bet you it's over 100 boilers that those seven companies would represent. Now, we're not doing demonstrations on 100, but that's the size of the utilities. What they do is they'll look at their fleet and there'll be certain characteristics of their fleet, and they will say, well, let me test at this number of them and that will give me a pretty good feel on what the rest of the fleet will do.

And then on the cash, now with these recent wins you've had here, your cash position is quite solid and your cash flow is looking even better with the -- with this CyClean. What do you do with your cash position?

Well, right now, it's -- we don't have a need for additional cash until we start looking at expanding AC production, which may be a year or so away. So right now a little bit of that will fuel some of these growth opportunities. But I think we're just going to be sitting on it for right now.

Okay, great. Thank you very much. I'll jump back in queue.

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

Morning, guys.

Morning, Al.

Just an easy one here for Mark. On the SG&A side, how much of the reported SG&A was sort of one-time or legal related? If you strip that out and look out how the business is doing without the one-time expenses.

Well, you know, this is a little bit off the top of my head, Al, but I would say probably a good 70% of the amount there represents legal costs associated with what we feel is one-time. We will get through that, we believe, get through those matters this year.

Do you have some one-time expenses related as it relates to the second -- or the one in October, either this quarter or the back half of this year?

Yes. Those are -- the costs associated with the hearings that are scheduled in October will continue to the third quarter and into the fourth quarter as well. So there's still some discovery and some other preparation for the approximately four-week hearing that will go on in October, commencing in October.

Is the intensity or the nature of it, I know the seriousness of it is justified. But how should we think of the level of dollars? Is the previous lawsuit consistent with what you're spending here or expect to spend?

I think we've seen some increased activity over the last couple of months, but what's happened here, obviously, the Calgon matter is trending down. Although the trial was in July so there were considerable expenses associated with the Calgon matter in July because of the trial. And then we're gearing up for this -- the hearing in -- on the Norit matter in October. So we will see some continued increase there. So I think overall, they will be somewhat of a similar level, but maybe even increase a little bit.

Okay, thank you. And then Mike, I realize that there's a lot of moving parts here and keeping things up in the air, but is there any way you can talk to the refined coal and CO2 revenue expectations over the next, say, two quarters or four quarters? I mean, I know you commented generally that it's expected to grow and then the EC segment is expected to decline. But just trying to calibrate where the Company will be driving a revenue dollar value over the next several quarters.

Well, we are negotiating a contract with DOE on the CO2 and we expect that to be in place pretty close to the start of the fourth quarter. And then that will wrap up a little bit. But I think we gave some guidance on the earlier call, but if you use kind of a straight line of that $14 million over the 39 months, it wouldn't be too far off. There's going to be some spike in the middle when we're actually building the equipment, but it's going to be somewhat flat through that period, so you can model it that way.

On the refined coal, as we mentioned, this is in the process of ramping up that new equipment, new operators up there, and we hope to be in a pretty steady state operation by the beginning of the fourth quarter. So that will give us three months, July, August and September to level things out. At that point, it's going to be at that -- where it's generating about $2 per ton of coal. And this is times the 6.5 million tons a year, so it's going to be generating about $12 million a year of operating income to the joint venture, of which we get half, and NexGen gets half.

But then out of NexGen's half are the payments for what remains of that $4 million, so that's going to come out fairly flat. In the third quarter we will probably see it ramping up to that point and we'll be reporting that here in a few months. But it should steady out once all of these units are up and operating.

Okay, thanks. And then one just clarification. In terms of the cement MACT, obviously that's in discussions. But what's the -- I think you need your customer or potential customers to reach some compliance. Are they going to -- are they being forced in the short term here to meet a certain deadlines so that the market will develop pretty quickly? Or is there still some holes in terms of the time frame that the cement MACT will drive sales for you?

Well, it's similar to the power industry in that once it's final, they've got three years to implement. So the problem for the cement companies is most of the mercury control work and the control of the organics and hydrocarbons, that's been done on the utilities side. So they're kind of starting at zero on what they're going to have to do.

So what we're starting to see with the cement companies, I mentioned that we're close to contract with three different cement companies, is to do this initial testing, small-scale testing to look at what kind of carbon it's going to take to capture both mercury and the hydrocarbons. And once that's done, then they'll have to look at ordering equipment.

So it's something that's going to go through the same three phases that we see for the power industry. First testing, then buying ACI injection equipment and then activated carbon, with the plan that they have to be in compliance in 2013.

Excellent. Thank you for the color, Mike.

Your next question comes from the line of Kevin McKenna with Stifel Nicolaus.

My question kind of follows up on what Al was talking about. With cement we have three companies. How many of the 90 kilns do they have?

Well, I'm not so sure I can give you that. They're probably covering those 90 kilns, maybe 15 companies.

Okay, that's fair enough. And then my other question is when you look the -- or kind of a side to that, the industrial boilers, I noticed that sometimes they're running at lower temperatures. Do they have specific needs as two mercury containment on those that will be unique to them?

There's a number of things. Actually, most of them run at higher temperatures because they haven't found a need to make them quite as energy efficient as a power company and so there's a little higher temperatures. So there's going to be some technical challenge.

There's also some marketing challenges. If we look at the utility market, that's 600 to 800 ACI systems, of which I think maybe 85%, 90% of that is covered within 30 power companies. The industrial boilers, there are some that are owned by companies that will have multiple industrial boilers, but they're going to be smaller and have a lot more owners. So it's going to be looking at other potential distribution systems. We're going to have to simplify the equipment quite a bit. The ACI equipment doesn't scale down well cost-wise, so we're in the process of developing equipment that will be much cheaper for these.

So there's going to be some marketing challenges relative to the products we provide and how we sell to that industry, and we're in the process of trying to put that together.

And we would expect the orders for those to start the next year in mid next year for both of those?

Yes. It's kind of like what we just talked about what the cement. We are starting to have some discussions where, especially for the larger boiler owners, like a pulp and paper company might own 10, 15 boilers. They might be interested in these early test programs, help us understand what we're going to need to get there so there -- it will be these -- the same kind of three-phase programs. Some testing in their early phases, then the purchasing of equipment, and then the carbon.

All right. And -- so the -- from your presentation, the systems are going to start around $190,000 and go up from there for the industrial and cement kilns, is that about right?

Well, the industrials will be kind of all over. They have some big industrial boilers but they also have very small ones. So there may be some sub $100,000 equipment for some of the smaller boilers.

The cement kiln systems will be almost similar in scale to the utility size but they will not require as much -- as many bells and whistles and redundancy as the utility sector. So that -- there's going to have to be some cost reductions there. So we're almost looking at three different product lines for this. One is the utility scale, ACI system, the other is the cement line, and then the third would be the smaller ones for the industrial boilers.

And is there any way to anticipate a win rate with those?

Both of those are going to be new markets for us. So we feel more comfortable with the utility MACT and what we have seen in the past because we have got history there. We have got evidence from the first 150 systems sold. These other markets are going to be new for us and new for everybody.

Thank you. That's all from me.

Thanks, Kevin.

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

Good morning, guys. Question about the consulting contracts for the cement kilns and some of the utility stuff that's coming on. Those consulting contracts, will that revenue come 100% to ADA or will those consulting services be provided by Carbon Solutions?

The way it's broken out, as we look at the three different phases, first of -- and it's a little bit more than just consulting. It's installing equipment, it's operating equipment, and doing these tests in the field. But divide that into testing, activated carbon injection equipment, and then supplying the carbon. ACS is only supplying the carbon.

So all of the revenues and the potential business around the initial testing and demonstration of the technology and all of the equipment sales are 100% within ADA-ES, and all of the carbon sales are within ADA Carbon Solutions.

Okay, great. And can you give us some idea of what the ramp of the activated carbon sales looks like over the next few quarters? And as part of that, what's the operational status of the interim plant? Have you stopped operating that? Are you getting significant output out of the new plant to be able to shut down the interim plant?

The first question on the ramp up. The market for AC now is in -- there's a few new plants that are starting to come online over the next three to four quarters that have some pretty healthy volumes they will need. There are a few contracts that were placed early on in the mercury control that are coming out for rebid. But other than that, there's not a lot of new markets out for the utility boilers until these new MACTs start kicking in.

We're in the process of balancing the transition from the interim supply to the new supply. And that will be occurring over the next couple of months as we have to make sure we have a continuous supply for our customers and trying to balance that off as we're starting up the new facility. So we have a fair amount of inventory. We are trying to work down that inventory so that soon we'll be providing 100% of our -- of the product to customers from Red River.

So the interim plant is still in operation?

We have inventory there that we will continue to process until we have used up that inventory.

I see. How much inventory is that, Mike?

I don't have those numbers.

What kind of time frame are we looking at the terms of when you will finish -- close down the operations at the interim plant?

This transition is going to occur over the next couple of months.

So sometime in the next couple of months, you'd expect to cease operations at the interim plant and begin satisfying all the customer requirements out of the Red River plant?

Yes. We think that's how it's going to work out.

At some point I thought you had announced that you had sold -- already sold some portion of the capacity in the new plant. Maybe it was 60 million tons a year or something like that?

It's not quite that high. The numbers we had put out was percentage of the total production, and I don't have an update on what that is. We're going to be operating at a loss in ACS probably through the end of next year.

Okay. And your ownership in ACS at this point is 30%?

That's the current ownership, yes.

So how will those numbers flow into your P&L?

Well, they flow below the -- as a minority interest at the equity line.

Okay, so revenues --

It won't show as revenues or as operating.

We won't see any revenues or operating expenses? So as their revenues ramp, we won't be seeing that on your balance -- on your P&L, your income statement. All we'll be seeing is basically your share of the loss or income.

That's right. So you look at our two joint ventures. With ACS we are a minority interest, so that will be paid out below the operating level. On Clean Coal Solutions, we're actually consolidating the revenues from both sides, from both ops and NexGen, and then we'll pay them out below the operating level to payment -- an equity payment.

Okay, great. Thanks very much.

(Operator Instructions) Your next question comes in the line of Dan Mannes of Avondale.

Good morning.

Morning Dan.

Sorry, I missed some of the earlier parts of the call so I apologize if I'm re-asking questions. But first on ADA CS, you mentioned your equity position. One question I have there is did you give an update on the loan guarantee process and where that stands?

Well, we're still in the same position we've been. It will probably be through the fourth quarter before that is finalized.

Okay. And then separately, if my read of the last Q is correct, ECP has an equity stake, a debt stake and a preferred stake. After the loan guarantee closes, will there still be a layer above equity that ECP has? And will the 30% equity be sitting behind stuff I guess is what I'm asking other than the debt?

Dan, this is Mark. Yes, that's kind of our expectation. A lot of that debt level depends on what the other terms are, but as you mentioned, and it's exactly right now, they have a common equity position, a preferred equity position at this time and then they are providing the bridge loan.

We certainly would expect the debt, any commercial or the DOE debt to take out the bridge loan and likely a portion of the preferred -- their preferred position. But until that gets finalized, we won't know those exact numbers.

So your total equity position, including the preferred may actually be less than 30 because you'll be sitting behind something potentially.

Yes, sitting behind some of the -- so when you look at the payout that occurs from that, the preferred gets paid out first when there's distributions made before the commons start sharing in that.

Got it. And then briefly on the refined coal, and I'm sure you talked to this and I apologize for asking you to repeat. Did you give any discussion on what some of the start up operating issues are and maybe as part of that, if you could explain a little how these plants work, that might be helpful?

Well, it's just -- it's new equipment and new operators, and so it's like anything else you start up. There are some bugs in the system and we're trying to integrate with a plant. So the way the plant -- the way the processes operate is we buy coal from the coal that's delivered to the plant. We add chemicals to it and then those -- that refined coal is then put on a belt that goes to the plant.

So it's -- as we start up, there were some issues in just getting the equipment interfaced with plant operations. And so it doesn't go from zero to the equivalent of 6.5 million tons. It's going to be kind of a ramp through the first couple of months up to that level.

Is there -- and so how is this chemical applied? Is it a solid? Is it a liquid? And is that part of the issue or is it really just sort of conveyance? I guess it doesn't seem like, I mean currently, doesn't coal basically go on a conveyor belt? Isn't that basically how it's interfaced? I guess I'm trying to understand what the issue is.

Well, there's a number of issues. One of the issues is there is some plant equipment that is down that's impacting what kind of coal they can burn and how they operate. So it's a combination of our equipment, it's a combination of the plant equipment that's going to impact how much coal they're burning.

So, okay. So now you're saying it's an issue of how much coal in total or how much of your coal? I guess I'm a little confused now.

Yes, it's both. It's just -- there's a number of complicated issues at the plant that are going to get resolved over the next couple of months.

I mean but just looking forward, given the vagaries of operating a coal plant, your 6 million or 6.5 million tons, is that based on the plants running at full output, or does that assume these types of the issues, maybe not this severe, but some issues in the future?

I think the 6.5 million tons is the average over the last 10 years.

And with about the average over the last two, just given declining production or declining demand for electricity?

Not much change.

Okay, got it. And then -- actually, that will do. Thanks for your time.

Okay.

Your next question comes from the line of Bryce Dille of JMP Securities.

Hi, guys. Thanks for taking my call.

Hey Bryce.

Just a question. Are you looking to sell some of the excess capacity on the carbon facility and the potentially other end markets until we see the Federal MACTs driving the AC market on the coal side?

Yes. Now that we're producing product, we can actually have our product tested and then sell it into the -- a number of different markets, water, food, and beverage. So that was one of the limitations where we were able to buy carbon for the mercury control through the [Aeron] facility. We were not allowed to do that on the water side until we were producing our own product that could be tested by the groups that qualify the product. So we hope to enter some of those markets.

Okay. And then you mentioned earlier on the call that some of the AC contracts are coming up for rebid on the coal side. Can you just remind me of those markets? And then also, I believe Illinois, you have to be certified to sell into there? Are you certified at this point?

We haven't done that yet. We are gathering data to do that. So it just depends on the length of the initial contract. For example, we've already won one contract that was a rebid. So that if some of the earliest contracts started in 2006, 2007, 2008, so those are two or three-year contracts, they might come up for rebid in this time frame over the next couple of years.

Okay. And then just last one. Just in regard to the Calgon lawsuit, I think you guys were provisioning for about $8 million type settlement, and the outcome obviously came in higher. Can you give us a little color on what was the driver on that side?

Well, it was the jury looking at the situation and what they thought about the two companies and they went and deliberated and came out with a number 50% more than we asked for.

Okay. Thanks, guys.

Your next question comes from the line of Steve Santos of RBC.

Good morning, fellows. Just a real quick question. On the IRS regulations on the extension for the Section 45 tax credits, Mike, can you give us any color as to where that stands right now? Looks like the energy bill is on hold for an undetermined time frame. But do you have any guidance that you can provide there, Mike?

Well, as you know, it's pretty hard predicting what Congress is going to do, especially in this election year. Basically, we need a vehicle. A bill that's going to go through that either has an energy component or a tax component. There's still several parts of the tax extenders and tax-related issues that were considered must-do last December. Well, they're still must-do. So they think that there will be another tax bill, possibly an energy bill, but it's all up in the air at this point.

The good news is because at best we're looking at a September, October date, it's unlikely that they would go to the trouble of extending these tax credits and other tax-related issues only to the end of this year. So I think what we're looking at is, if we do get the extension, it will be for 2011, which will give us time to input these.

But the arguments are the same. The need for this as well as other tax extenders is still out there. But it's just a matter of how dysfunctional Congress has gotten and whether they will be able to get anything done when they come back from recess in September prior to election, or will they -- we'll have to wait until a lame-duck section -- session after the election.

And do you still feel fairly confident with these additional contracts over and above the two that you have got so far in the event that they do the extension?

Well, the interest is definitely there. We feel really strong in the interest and our ability to sell. What we just don't know and have no control over is whether Congress is going to move any bills that we can be part of.

Okay. Thanks, Mike.

Okay.

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

All right, well thank you everybody for joining us today and for your continued interest and investment in ADA.

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