Arq Inc (ARQ) 2010 Q3 法說會逐字稿

Good day everyone and welcome to the ADA ES Q3 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 expressions of these words, or words of similar meanings.

Actual events or results could differ materially from those discussed in the forward-looking statements as a result of various factors including factors discussed in ADA ES's filings with the US Securities and Exchange Commission, with particular emphasis on the section entitled risk factors in ADA ES's 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's securities. The forward-looking statements made during this conference call are presented as of today's date and ADA ES disclaims any duty to update them unless otherwise required by law to do so. A recording of this call can be found in the investor resources section of our website, www.ADAES.com. Now, I would like to turn the call over to Mark McKinnies, Chief Financial Officer.

Thank you, Michael. Good morning, everyone. And thank you for joining us on this Veteran's Day for our third quarter 2010 conference call. We do want to thank Veteran's for their service to the country and want to remember them today.

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.

Revenues rose 101% to $7.5 million for the quarter as compared to $3.7 million in the 2009 quarter. The increase is due primarily to initiation of revenues from operations at the refined coal facilities we lease to a third party. Offset by less significant decreases in our emissions control, EC, and CO2 capture, CC segments during the quarter. Revenues for the third quarter of 2010 in the EC segment amounted to $2.6 million down 17% from $3.1 million in 2009. And we're comprised of sales of ACI systems through gas chemical sales and consulting services.

For the quarter our ACI system sales contributed approximately $1.2 million compared to $1.9 million in the 2009 period. Our consulting revenues contributed approximately $1.1 million during the third quarter of 2010, as compared to approximately $1 million in 2009. As we saw a slight increase in mercury controlled evaluations and testing. We expect a continued similar level of consulting revenue for the next few quarters as several customers are seeking advice on how best to comply with the expected EPA MACT regulations. Through our EC segment we performed about $300,000 worth of work in the third quarter related to refined coal systems provided to Clean Coal Solutions, LLC. Our joint venture with an affiliate of NexGen Resources Corp. that would otherwise be recognized as revenue but were eliminated in consolidation of clean coal.

We had contracts in progress at quarter end for work related to our EC segment with remaining revenue of approximately $4.4 million. $1 million of which we expect to complete and realize in the final quarter of this year with a balance to be completed and realized in 2011 and 2012. We expect our EC segment revenues to remain at lower levels until such time as utilities, cement plants and industrial boilers start to react to the new and anticipated Federal MACT regulations. Our DOE, CO2 and related industry consulting contract revenues from efforts in developing and testing solid sorbent technology for our CC segment were $467,000 for the quarter, and as of September 30, we had DOE contracts in progress, totaling approximately $19.3 million of which $1.1 million we expect to recognize in 2010.

As we previously announced and included in that amount, is the DOE award of approximately $19 million, which amount includes cost-share participants. For our phase 2 work for CO2 capture, we started generating some revenues from those activities in the third quarter and the now 51 month program should generate significant revenues and income for the Company through 2014. The refined coal facilities commenced operations at the very end of the second quarter and ramped up to anticipated long-term treatment rates of 95% in September. We expect these facilities to generate over $15 million annually, in revenues for the Company, and over $7 million annually in pre-tax net operating income. Which is after deduction of the 50% interest held by NexGen.

At the end of the second quarter, Clean Coal completed transactions for the lease of its two refined coal facilities and received a nonrefundable advanced payment of rent totaling $9 million. Income from the advance is being spread over the 10 calendar quarters through December 31, 2012. Which represents the initial term of the leases. And is being combined with a fixed and contingent rental payments to yield the revenues we have and will recognize over the anticipated 10 year term of the tax credits. All of these resulted in total revenues of $4.5 million from our refined coal activities in the third quarter of 2010.

Overall gross margin increased to 78% for the third quarter in 2010 as compared to 32% in 2009. Primarily as a result of the high margin recognized for the refined coal activities. We expect gross margins for the EC and CC segments for fiscal 2010 to be consistent with levels achieved in the fiscal 2009. And gross margin for the RC segment to continue at a level near 95%. General and administrative expenses increased to -- by $2.6 million or 32% in the quarter to $10.5 million and $7.7 million to $21.2 million on a year-to-date basis, primarily due to cost related to our legal proceedings with Norit Americas Inc. and Calvin Carbon Corporation.

Our legal costs in 2010 represent approximately 85% and 75% -- 76%, excuse me, of our G&A expenses on a quarterly and year-to-date basis respectively as compared to 84% and 70% respectively for the same periods in 2009. The trial on the Calgon matter was held in July and the jury awarded ADA $12 million in damages for breach of contract by Calgon. Calgon has appealed the verdict. We don't expect to recognize any income from the damage awarded until or unless we receive payment from Calgon. While we expect our litigation expenses for the fourth quarter to be at a similar level in the third quarter -- as in the third quarter, these expenses should be reduced significantly in the second quarter of 2011.

R&D expenses increased $83,000 to be $258,000 for the quarter, and were $639,000 year-to-date as a result of continued refined coal and 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 third quarter of $5.8 million or $0.78 per share includes a noncash loss of $2.5 million related to our equity interest in the net loss of 88 Carbon Solutions, our joint venture with Energy Capital Partners, and a deduction of $1.8 million for NexGen's share of Clean Coal's consolidated income.

We expect Carbon Solutions to continue to incur losses in 2010 as commercial operations are ramping up and other development activities continue this year. In addition, as a result of the amounts due to us from NexGen to maintain their 50% interest in Clean Coal, we recorded additional income of $122,000. We expect the balance of approximately $2 million to be paid by NexGen through 2012, which payments we also expect to record as other income as they become due.

As a matter of note, had we not had nonroutine legal expenses related to the Calgon and Norit matters and disregarding noncash loss from Carbon Solutions we would have reported net income after tax of approximately $1.2 million or $0.16 per share for the quarter. Cash flow used by operations was $4.7 million for the quarter compared to cash used of $523,000 for the same period in 2009. Year-to-date cashflow provided by operations was $4.4 million as compared to cash flow used by operations of $1.6 million in the first nine months of 2009.

The Company's consolidated balance sheet as of September 30, 2010, reports cash and cash equivalents of $3 million and working capital excluding deferred revenue of approximately $8.9 million. We have no long-term debt and shareholders equity totaled $14.1 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 products. EPA continues to move forward on three different maximum achieval control technology or MACT standards that would increase the markets for control of mercury and other hazardous air pollutants.

First the MACT for submit counts was finalized this summer and will require cement plants to reduce hazardous air pollutants by 2013, including 92% of the mercury and 83% of total hydrocarbons. We're currently testing at two cement companies and in discussions with others. Second, the schedule for finalizing the industrial boiler MACT was extended 30 days until January 2011 to give EPA time to address the public comments. The industrial boiler MACT has generated interest in test programs from a number of companies with multiple plants with boilers that will require emission control equipment including activated carbon injection, ACI for control of mercury as well as organic.

Third, the utility MACT for coal fired boilers is still on schedule for the draft to be released in March 2011 and become final in November 2011. EPA has released some of the field testing data that will be used to set the standard. Our analysis -- initial analysis of this data indicates that the standard, which is based on the best performing 12% in the industry could result in a very strict emission limit for mercury. Many power companies recognize the urgency of these pending regulations and as a result, we already have contracts for testing at seven different power plants and are finalizing a contract for another two.

These projects not only create near-term consulting revenues but they also put us in close contact with companies that will be purchasing ACI equipment and signing long-term contracts for activated carbon. We believe these regulations are likely to create a lot of opportunities for ACI equipment and AC supply over the next four to five years. The first wave of the MACT-generated market will be in the form of increased demand for ACI systems between 2011 and 2014. Our goal is to maintain our 30% market share, which would require rapid scale-up of our production capabilities. Of the activated carbon side we predict the full implementation of the MACT regulation will create a significant gap between AC production, capacity and demand that would require significant expansion of AC production in the US for which ADA carbon solutions 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, commenced commercial operations in May. Operating on the first two of four furnaces the plant has produced 9.5 million pounds of AC and has been supplying to customers in the power industry for mercury control. The plant is nearing completion of the construction phase and is expected to be able to run at full capacity sometime in early 2011. Of note, our AC product has recently passed certification testing that will allow it to be sold into the water market. Based upon current sales forecast ACS expects to generate positive EBITDA in 2011.

The next topic is the exclusive development and licensing agreement we signed with Arch Coal in June for promising ADA technology aimed at reducing combustion related commissions of mercury and other metals from Arch's Powder River Basin or PRB coals. 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 coal sold by Arch depending upon the successful implementation of the technology and Arch's future sales of resulting enhanced coal product. Arch currently produces more than $100 million-tons of PRB coal per year.

The next step is to begin testing the enhanced coal at a number of different plants. We have scheduled three tests during the next few months. They will give us an initial indication of the potential of this product.

The new technology will be complementary to our other innovative technologies such as cycling, flue gas chemicals and AC injections systems that enable us to help our power-generating customers meet the challenges of existing and pending emissions control regulations.

I will now update you on the refined coal product CyCean which is sold through Clean Coal Solutions. Clean Coal successfully put into two systems into service last December. Thereby meeting the year-end deadline set by RS for production of refined coal from facilities to qualify for section 45 tax credit.

In late June we announced we had completed all contractual and technical activities necessary to begin producing and selling refined coal on a continuous basis. Even with start-up issues typical of new technologies at power plants, sufficient refined coal was produced and sold during the third quarter to generate $4.5 million in revenue for ADA.

In the latter half of the third quarter, the facilities ramped up production to expected continuous levels and are now treating over 95% of available coal used by the four generating units at the two power plants. With the rapid ramp-up of these two systems we're now closely mirroring the operations of the power plant. We expect these systems to provide significant cash flows for ADA over the next 10 years. Our quarterly revenues from refined coal will likely reflect seasonal variations and electricity demand as well as planned and unplanned outages required by the power plant for equipment repair and maintenance.

The next item relates to our newest coal -- clean coal technology program. As Mark mentioned last month we announced that we had signed a new contract with the Department of Energy to continue development of technology to capture carbon dioxide from coal-fired plants and industrial sources. ADA will be the prime contractor for the approximately $19 million project that will be administered by DOE's National Energy Technology Laboratory, which is providing $15 million of the funding. We expect approximately $4 million in co-funding and support to be provided by several major utility companies including Southern Company, Luinant and Electric Power Research Institute.

The project provides funding to advance ADA's commercialization plan for regenerable solid, sorbent technology. Work on the new project has begun and expect it to run for 51 months to scale to technology up to the 1 megawatt level which is a key step in the technology development process. The contract will not only fund R&D for the process but it will also provide significant contributions to ADA's revenues and margins over the next four-plus years. Earlier this year, ADA began 1 kilowatt pilot field test of this technology on a $3.8 million program co-funded by DOE.

We have completed the first test program at a Luminant Power Plant and the results confirm the promising performance ADA had demonstrated in the laboratory. The pilot plant has now been moved to a plant operated by Xcel Energy for additional testing. Once captured, the carbon dioxide could be either stored underground or beneficially used in processes such as enhanced oil recovery. This technology appears to offer potential costs and energy advantages over competing liquid solvent-based technologies. Those interested in additional details can download technical papers and presentations from our website.

Finally, let me briefly address the Norit lawsuit. The full rig hearing in front of three arbitrators was completed last week. It will be a couple rounds of legal briefs to be prepared and presented with a final ruling expected late in the first quarter of 2011. Because this is a confidential proceeding, we're unable to answer any questions about the hearing at this time. Before we open up the call for a brief period of questions, I would like to point out that we will be presenting at the Ingalls and Snyder Specialty Chemical Seminar in New York on November 16, and the Robert W. Baird Clean Technology Conference in San Francisco on December 1. Hope to see many of you there. Operator, we can now open up the call for questions.

(Operator Instructions) Please stand by for your first question. Our first question comes from the line of Graham Mattison with Lazard Capital Markets. Please state your question.

Good morning. Guys.

Good morning.

Putting on the Arch Coal process, when do you think you might be able to see the first revenues being contributed from this? If everything goes accordingly to -- to the plan?

I think it will be some time, possibly some time in 2011, but it is hard to say when. These first three tests will be like the way they normally do things in the power industry, they take a test train, to -- try a unit train load and then after that it would go into negotiations and depending upon the timing of their contracts. So it could be 2011, but we don't know exactly when.

Graham let me clarify a little bit about the revenue recognition. Arch made an upfront payment for $2 million that we received in June. That amount is being amortized over approximately an 18 month period. So there are some current revenues that we're recognizing from that and from some of the test programs that we're performing from them but as far as any royalty income that we might recognize from that, I think that fits into the timeframe Mike was speaking to.

Got you. And then on the ACI consulting, you mentioned that you're close to finalizing two more consulting contracts there. Can you give a sense of how many boilers you will be looking at with these new contracts and I guess in total once you have all nine of the companies under consulting agreements?

Well, these are nine different power plants but it is working with probably four or five different utilities that own -- you know, 10's of plants. So what these are, these are picking out units in their fleet that they have the most question about, or whether -- and how they might be -- what they have to do to meet a potential MACT regulation. So, some might have 20 different boilers in the fleet and only want to test a couple of them that are represented of them, so the numbers I gave you were the number of specific plants we will be testing in.

With the potential to expand it out to those other ones would probably be how many boilers, would that be 50?

Well, with -- with -- just this first four utilities we're working with, my guess would be, it would be on the order of 50 boilers. That -- that is in their fleet.

Got you. All right, great, that's very helpful. Thank you very much.

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

Good morning, guys. Looks like you continue to make some progress which is great to see. I wanted to focus on a couple lines on the P&L, and obviously the business units around it. In terms of the refined coal, is this the -- a volume level in terms of pounds? How should we think about that over the next couple of quarters in terms of the level of production?

Well, what we're doing is mirroring the plants usage. And so what happens is coal-fired utilities, the summers and winters are peak season. The fall and the spring are shoulder seasons, and so that's also time they schedule outages. So there is going to be these seasonal variations but we are pretty much following the plant so, what you're seeing is the $4.5 million in revenue was not running at full capacity the whole time in the summer, but when we look at that, what we might expect from kind of annual usage levels at this plant over a number of years, that's where we come up with the $15 million a year expectation. But that's going to show some seasonal variation.

Right. Okay. So following those seasonalities, I mean, maybe it is 60%, 70% of those numbers fall in those two quarters and the week or that's how we should think about it. Of course those are my number, 60% to 70%. In terms of the equity loss in carbon solutions, again, I realize there is some variability around this but how -- your comment I think was EBITDA positive for the full-year in 2011? Does that mean that the first couple of quarters are not quite EBITDA positive? Or neutral? Or how do we think about the trends of that, Mike?

I'll let Mark address that.

Yes let me -- they will continue I believe to ramp up during the year, Al. So at -- the estimate there is based upon their -- their overall for the year. But I -- based on what I have seen so far, there is a ramp-up during the year so this is the average for the year.

Okay, but are you able -- I mean, should we think of Q3 as being a peak loss? Or is there still higher absolute dollar levels to come given where you're at in terms of volume and production, et cetera?

They are continuing through, as Mike mentioned, completing the construction phase, and having plant turned over, so I think that what we saw in the third quarter is certainly representative of completion of that phase of the operations. And that is the information that we have at this time.

Okay, and then -- I'm sorry I may have phased out here but on the tax item, that was pretty high, but what is the components there of the tax line item?

What we show there in the tax item is the benefit of -- that is created by the loss that we recognized. So there is a either you -- and the tax rates around this 37%, 38% level, so it is pretty common kind of rate based upon what the -- the loss that we had.

Is there any tax credits in there for -- for the coal business?

No. Those tax credits all flow to the -- the entity that is leasing the facilities.

Okay. So, but I think it was 47% was sort of basically your P&L effective tax rate which seems a little high.

It may have been for the quarter. I think it is important to look at that on an overall basis for the year so there are some fluctuations quarter-to-quarter based upon timing of some issues.

Okay. And then the JV loss, 1.9, how is that, should we think about that in terms of trending.

I think you've got a little misunderstanding there. It is not a JV loss. This is the--.

Sorry, income pardon me.

This is NexGen's portion of -- as a minority interest, their pick up of Clean Coal Solutions net income. So--.

Right.

So we have to -- we deduct that out in arriving at our bottom line. That portion of the net income that is apportioned or belongs to NexGen.

And the level of that income is consistent with what we should see going forward, or how do you suggest we--?

Well, it will follow just as we -- as Mike discussed, kind of the revenue levels of what we have talked about as this $15 million a year, plus -- in excess of that is revenues. About $7 million of net income to us, so there is about a $7 million that flows to $7 million plus that also flows to NexGen out of this transaction as well. So that will have seasonal variations in it, much like the--.

Sure.

--revenues do from the -- are mirroring the coal use at these two facilities.

Okay. Thank you very much.

Your next question comes from the line of Ben Callo with Robert W. Baird. Please go ahead with your question.

Hey, Mike, and Mark, how are you?

Good morning.

You mentioned next year could be break even at Red River. Do you need to ramp the full outfit? I guess you don't with your last comments there but what level of output do you need to get to that full-year EBITDA-positive number? Just a roundabout would be good.

I think it is less than 50%.

Okay. That's helpful. And then you mentioned that you expect next year, the ACI unit demand to start increasing up to 2014 and you're going to have to ramp your production. Could you just kind of give us a reminder of what your production is now and then what you need to do to increase production, or how you ramp up your production?

Well, again, if we look at the initial market, which was the state rules, that was 150 systems sold over about a five-year period and we got close to 50 of those. So it was kind of on the average about 10 per year. What we're seeing from the market from a MACT would be on the order of anywhere from 600 to 800, over a period of about three years. So it is essentially kind of ramping up from -- going from about 10 a year to potentially 100 a year during that timeframe. Depending upon the timing and response of the customer. So what we are doing is we have been increasing our staff on the engineering side to design those. We're looking at increasing partnerships to aid in the fabrication of that. So we're trying to put that in place now so that we're ready for this market once -- once it hits which we think will be as soon as -- as early as that release of the draft in March will I think stimulate some activities.

But just as a reminder, you guys -- you guys use partners for the actual manufacturing--?

Yes, we're kind of the overall general contractor for those. We have a number of different partners. We do all the engineering ourself but one of the things we are doing, we're trying to standardize that process so-- on a fleetwide basis, so the -- those first 50 systems were almost all custom. So that it was 50 different designs. What we're looking to go into this next market with is more of a standardized design so we don't need 10 times as many engineers to sell it. It may be two to three times to be able to reach out. And so yes, it will be identifying other fabrication partners to help us meet those levels.

Okay. And then any update on the Chinese anti-dumping tariff and how that has potentially helped or hurt you?

Again, we don't see much impact of the Chinese markets on our business, and we -- we just don't see it as a viable option in at least the coal-power side of the activated carbon business.

And then we have been hearing a lot more about potential of gigawatts of coal plant closures over the next few years as some of these environmental regulations come into effect. How do you look at that when you're trying to make your market estimates for MACT activated carbon?

Well, we work with other people in the energy industry. I think you look at even the coal companies, they are projecting significant growth over the next years in coal sales. So it is retiring some of the oldest units. Probably the biggest driver for shutting down coal is not the MACT type regulations but the climate change. The greenhouse gas, CO2 regulations. And what we're hearing in Washington is that was very much on the table, six, nine months ago and it seems like the thinking now is that that may be off the table for the next four to five years so, you might see a pretty significant change in the projections around retirement because of that.

And then finally, as you look out to making the next step for Line 2 at Red River, what is the threshold or what is the event that you need to -- do you need to occur to make that next step?

Well, it will be the response of the customers to the -- to the MACT regulation, in the form of signing up contracts for the products, so, we think that timing will be -- where it may have to be up and running in the late 2014 timeframe, so that means starting construction in the 2012 kind of timeframe.

I know I said that was my last question but one more. I have seen some of your competitors announce price increases. Could you just give us an update on what you're seeing out there in pricing?

I think what we're seeing, I think things have been pretty steady here over the last six to nine months.

Okay, thanks, guys good quarter.

(Operator Instructions) Your next question comes from the line of Dan Mannes with Avondale. Please go ahead with your question.

Thanks good morning. Hey, a couple quick follow-ups on the carbon plant. You're saying break-even EBITDA next year. And I guess I didn't really catch your answer in terms of what the output needs to be and I guess the second question is given your current contractual situation on mercury how much do you need to sell under the watermark to get to that break-even mark?

Well, I don't think we have an exact number, but I said it is on the order of 50%.

Okay.

Plus or minus, and I -- I don't know -- we're not ready to give a breakdown on the split between the water and the power side of that.

Okay. But there would need to be some water sales in there given your current -- given your current contracts on electric?

Well, it includes some sales in the water market as well as winning some of the -- winning some of the -- the mercury control bids that are out now.

And in terms of the bids that are out there right now, what do they primarily relate to? Are these some of the lingering state bids, is this the Canadian stuff and how would you describe the current market for new carbon contracts?

Well, the new carbon contracts are primarily coming from new power plants that are coming online in the 2011 and 2012.

Right.

And so, some pretty significant size plants out there being bid. Not seeing much as far as any new state actions as long as the MACT is out there I don't see any states moving forward on their own. But then, we're also seeing some contracts come up for rebid, that were early contracts from the states. So we're seeing some rebids on users that may have put in a contract in place prior to our ability to bid on those. It is probably that combination that is creating the most opportunity.

Got it. And then briefly on the water side, have you guys discussed what your mechanism is for approaching that market? I mean, do you have a different sales group or are you going to be using distributors? How would you go after that market with this product?

Those are two good options and that's -- we just got our product certified, we couldn't even bid on contracts until we received certification. So we're still in the process of developing the strategy for that.

Okay. And your comment about expecting to be EBITDA positive in 2011, in total, given some of the leverage and capital structure on it, in order to get to break-even from a -- from an equity and income perspective to you, does it -- how far above break-even positive EBITDA does it need to get?

Dan, that is a complex question that takes several items -- needs to take several items into consideration. Much of it will be dependent upon the final debt that gets placed. As we know now ECP or Energy Capital Partners, our partner there have provided the financing for the plant, it's certainly our intent to place that commercially either through the DOE loan guarantee that we have outstanding or otherwise as we look at the commercial markets. Much of that will be dependent on how that loan is placed. It is a little early to be responding to that.

Okay, I mean, given what you're saying on EBITDA, we shouldn't assume it is going to be -- we shouldn't assume it's going to be equity-income positive in 2011. Is that possible for 2012 though?

I think it is possible, it depends on the -- how industry responds to these -- the cement and the industrial boiler MACT that are out there now and additional AC sales, so it is certainly possible. We will have to see how -- how sales continue.

Got it. And then last thing on -- last thing on this topic, on the financing side, the DOE's had been out there for probably a year now. I was wondering if you can give us an update on what's going on in the financing. Is that held up because of the Norit litigation and then your commentary about looking at other commercial loans does that represent any issues -- for the DOE program?

Well, DOE wants to wait for the -- for be the Norit arbitration to come to completion, so that's -- it is just on hold until that is done at this point.

Okay and then depending on that outcome, you could you go back to the DOE or potentially look at another route?

Well, yes. We're -- we still have a term sheet with DOE that we would look at, the -- and, the government's lending process has a lot of good parts to it, and a lot of not so good parts to it so -- it is nice to have options as we -- as we move forward be in that direction, and what we're hearing is that the -- the commercial lending has become a lot more favorable over the last year or so that could be a competing option for us.

But as it relates to the current status of the DOE loan there is no other factor delaying this project other than primarily the outcome of the Norit arbitration?

That's correct.

Okay. We have just been hearing there were maybe some hang-ups and concerns of even funding levels for DOE.

I think the -- the moneys for this program were allocated in the recovery funds.

Right, there were originally six. Three-and-a-half have been pulled and the other two-and-a-half are under discussion.

Yes, and I think there -- there is a number of timing issues and we got ours in the earlier program which I think was fully funded.

Okay. And then one last question just on the SG&A line, you culled out and we appreciate this, the amount of the cost that was litigation-related. As you look forward and maybe even including some ramp-up for the equipment business, can you give us sort of a steady state ex -- ex lawsuit type SG&A number either quarterly or annually, just a way to think about it?

Well, you can look at the level we have now given the ex what we have given as nonroutine. That's a level to look at, Dan.

So you don't expect to staff up as it relates to the equipment business? Because I thought you had said earlier you did.

There will be some increase that relates to the kind of head count level that you would expect in any case. But not any other significant increases beyond that.

Got it. Thank you.

Your next question comes from the line of Bill Burns with Johnson Rice. Please state your question.

Good morning, guys, the only thing I have left is on the litigation expense that you just mentioned. You said fourth quarter would be similar to third and you should be significantly reduced in the second quarter of 2011. How should we think about the first quarter of 2011? Is that going to be somewhere between Q4 and Q2? Or more like the fourth quarter?

It should reduce somewhat in the first quarter as Mike mentioned, the remaining items that are -- as we look at the schedule there now, there are briefings that are being prepared and will be presented to the panel, those should occur and be done by -- in the first quarter, so that's a much less intensive effort than the arbitration that was -- occurred here -- that was prepared for and occurred in the third quarter and fourth quarters of this year. So, we expect those to be -- it to be somewhere between where the third quarter is and then ramping down to more routine levels in the second quarter of 2011, Bill.

Perfect, thanks Mike and Mark.

(Operator Instructions) Your next question comes from the line of Graham Mattison with Lazard Capital Markets. Please go ahead with your question.

Hi guys. Just a quick couple of follow ups. On the G&A expense and the lawsuit expense, can you split those between which trial went for which one and give a sense of how much the actual cash outlay for that was versus what ECP is picking up?

We're not splitting out between the two. The one way that you can look at the amount that -- that is noncash for us is to look at the increase in the liability on our balance sheet from quarter-to-quarter. That long-term liability. That's the amount that is being funded by the carbon solutions.

Got you. And then, again, the carbon solutions equity loss, that is noncash, correct?

That's correct. We don't have any cash requirements at carbon solutions at this time. Our next -- would be a decision in -- for the second facility and our participation in that as we have noted before, we have the right to participate up to a 50% level and any production expansions there.

All right. So regardless of how quickly that plant ramps, doesn't ramp what your ultimate share holding is, it is a noncash item for you?

That is essentially correct. We are -- we do have a -- on a common equity basis a little something a little South or less than 30% interest in it, but we don't have any current cash obligations there.

And there is no cash income from -- I mean, you will get obviously income but there is no -- it is a noncash item ultimately?

Yes.

All right, clears it up. Thank you very much.

(Operator Instructions) Your next question comes from the line of Steve Krueger with Forsythe Investing. Please go ahead with your question

Good morning, guys. Just a follow-up on what your view is of what is going to be happening to a number of coal-fired power plants. You addressed the impact of the election I think and what the -- what is going on in that regard but, I am wondering if you see any potential impact from the supply and pricing of natural gas in terms of decommissioning coal-fired boilers switching over to natural gas and how that might effect your opportunity in the AC arena?

The natural gas pricing is a very big issue and it shows up more in the capacity factors for the coal-fired power plants. If we look over this last couple of years, what is normal for a coal-fired power plant is to operate at about 80% capacity. Because of the combination of low gas prices and -- and the economy, that has dropped to about 60% over the last year or so. As the experts look out in the future, they think that is going to return to the higher numbers because they don't feel the gas prices will -- will stay down at this level. I don't think anybody does. So while gas prices impact a choice today, do I -- do I fire gas to make electricity to meet my demand, or do I fire coal? It doesn't have a lot of play on, well, gas prices is down, I'm going to shut down this coal plant and build a gas plant instead, because no -- you can't get a long-term contract at these levels on gas prices.

So you're saying that the potential impact on your AC sales is really more a function of what percentage of the electricity, the utilities are generating with coal as opposed to gas and the more coal they burn, the more AC they would use and less coal they burn, the less AC they would use? Is that the way to look at it?

Yes, it tracks identically to that so it will fluctuate, once we have a rule with the capacity of the coal plants but I think the long term view is that gas prices will continue to go up and coal will still remain at similar levels of producing 50% of the US electricity.

Okay. Thanks very much, Mike.

Your next question comes from the line of Bryce Dille with JMP Securities. Please go ahead with your question.

Good morning, guys. Can you just talk about your activated carbon margin profile for sales into the coal market and then sales into the water market? Would they be identical or do you have favorable margins in either one vertical?

Well, I don't -- well, we don't have any margins right now in the water. Because we're -- we just got in a position to start selling to it.

Okay. And then, just thinking about your commentary around EBITDA break-even at about 50%. How do you guys view your pricing power into the water market on maybe a go-forward basis?

We haven't got that far into it, and again, as a minority interest, that is outside of our purview at this point. So, we don't have the information and -- and -- or authority to release that kind of information at this point.

Okay. Fair enough, thank you, guys.

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

Well, thank you, everyone, for your joining us today and for your continued interest and investment in ADA. Also, since this is our last conference call for the year, we want to extend our good wishes for a happy holiday season and new year. So thank you.

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