Arq Inc (ARQ) 2010 Q4 法說會逐字稿

Greetings and welcome to the ADA-ES reports 2010 fourth quarter and year-end financial results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) This conference is being recorded. It is now my pleasure to introduce Melissa Dixon of The Equity Group, Investor Relations for ADA. Thank you. Ms. Dixon, you may begin.

Thank you Jackie. Good morning everyone, and thank you for joining us today.

Before we get started, I would like to remind everyone that 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 believes, will, hope, expect, anticipate, intend and plan. The negative expressions of these words are words of similar meaning. Actual events or results could differ materially from those discussed in the forward-looking statement as a result of various factors, including factors discussed in ADA-ESs filings with the US Securities and Exchange Commission with particular emphasis on the section entitled Risk Factors, and 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. A recording of this call can be found on the investor resources section of our website, www.ADAES.com.

Turn the call over to Mark McKinnies, Chief Financial Officer. Mark, please go ahead.

Thanks Melissa, and good morning everyone, and thank you for joining us for the ADA-ES fourth quarter and year-end 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 plans. After that, we will open the call for your questions.

Revenues amounted to $9 million for the fourth quarter, or 36% more than in 2009, and $22.3 million for the 2010 as compared to $20.1 million in 2009. The increase for the quarter and year are due to increases in our Refined Coal or RC segment. RC revenues amounted to $5.9 million for the fourth quarter and $10.4 million for the year due to the recognition of rental income from our two RC facilities, which replaced in the routine operation in the second half of 2010. We expect those facilities to continue to generate from $15 million to $20 million in revenue per year through 2019 based on the tax credits produced by their operations. We were currently pursuing the placement of several additional RC facilities as a result of the extension of the place and service date that was granted in December, as Mike will discuss further.

Revenues from our Emission Control, or EC segment, decreased by 30% during the fourth quarter and 38% for the year as revenues from activated carbon injection, ACI systems, slowed. Matching the power industry's wait and see attitude to addressing developing regulations. EC revenues contributed $2.6 million in the fourth quarter of 2010 as compared to a contribution of $3.7 million in the fourth quarter of 2009. The revenue decrease in this segment was somewhat offset by increased consulting revenues we have recognized from several customers who have initiated evaluation studies to determine how best they might respond to the expected regulations.

Revenues from our Carbon Capture, or CC segment, generated from our DOE and industry supported development and demonstration contracts increased 2% to $466,000 for the quarter and 36% to $2.1 million for the year. We commenced work on our new $19 million CO2 captured contract in the fourth quarter of 2010, which is expected to provide significant revenues for the Company through 2014. We believe finalization of the recently announced Mercury and Air Toxic Standard, or Air Toxics Rule, and other EPA maximum achievable control technology, or MAC regulations for mercury control, will accelerate and expand our markets likely starting later this year.

As of December 31, 2010, we had contracts and progress for work related to our EC segment totaling approximately $2.9 million. We expect to recognize approximately 90% of this revenue in 2011 with a balance to be completed and realized in 2012. We had DOE contracts including anticipated industry cost share amounts in progress, totaling approximately $18.8 million as of December 31, 2010. We expect to recognize approximately $2.4 million of these contracts in 2011, and the balance through 2014.

Our gross margin in the fourth quarter was 72% as compared to 16% for the fourth quarter last year. High margins realized in our RC segment, where the majority of RC facilities operating cost are paid by the lessor prior to our recognition of rental income, created the increase for the period. As a note, the fourth quarter 2009 margin percentage was markedly less than prior quarters due to the low margin on the refined coal bottom soldering testing, which was essentially done on a cost basis. For the year, gross margin was 61% versus 31% for 2009. Again, the improvement is a result of the high margins recognized in our RC segment.

General and administrative expenses increased to $11.6 million in the fourth quarter primarily due to increased legal fees associated with litigation which were in excess of $8 million for the period as compared to legal expenses of $1.6 million in the fourth quarter of 2009. For the year, G&A expenses increased by $16 million to $32.8 million due to legal fees which totaled more than $24 million for the year. The Calgon matter was settled successfully at year end with their payment to us as $7.2 million. We expect non-routine legal costs to decrease somewhat in the first quarter of 2011, and decrease significantly starting in the second quarter of 2011 as the Norit arbitration is expected to reach its final stages next month.

For 2010, we regarded an operating loss of $21 million as compared to a loss of $11.8 million in 2009 due largely to the cost of litigation. Below the operating line, we are reporting several items which include payments from NexGen R, a JV partner in clean coal solutions, made to retain their 50% interest in clean coal of $443,000 for the quarter, $2.2 million for the year. A net of $6.1 million in income for the quarter and Europe from settlement of the litigation with Calgon I previously mentioned, and deductions totaling $2.9 million for the fourth quarter and $8.0 million for the year, which represent our approximate 26% equity interest in the loss of Carbon Solutions offset by a minor amount of income from our 50% income of Clean Coal Solutions services, the Company we formed with NexGen to operate the RC facilities for the lessor. For the year, our net less was $15.5 million or $0.029 per diluted share as compared to a net loss of $8.8 million or $1.26 per share in 2009.

Disregarding the non-routine legal expenses related to the Calgon and Norit matters and the non-cash loss from Carbon Solutions for the fourth quarter of 2010, we would have recognized net income after tax of approximately $4.1 million or $0.55 per share compared to a net income on the same basis of approximately just $18,000 or less than $0.01 per share in 2009. Disregarding those same items mentioned above, for the year, we would have recognized net income after tax of approximately $5.1 million or $0.69 per share for the year compared to a net loss on the same basis of $21,000 or less than $0.01 a share for 2009.

Cash flow provided by operations was $7.3 million for the fourth quarter in 2010 compared to what cash flow used in operations of $44,000 in the same period in 2009. For the 2010 fiscal year, cash flow provided by operations amounted to $11.7 million as compared to cash flow use in operations of $1.6 million in 2009. Our balance sheet at December 31, reports working capital of $10.1 million. We have no long term debt and share holders equity totaled approximately $13.4 million at year end.

Mike will discuss the status and progress on several opportunities we are pursuing, and I'd like to turn the call over to him now.

Thank you, Mark.

2010 was very challenging year for the Company due to difficult economic conditions, the lack of growth in the air pollution control business as we awaited new regulatory market drivers, and the threat of two significant lawsuits. However, in spite of these adverse conditions we enter 2011 having not only maintained, but expanded our technical resources as well as increased our working capital and cash flows. So, that today we are stronger and well positioned to take advantage of a number of very significant opportunities for the Company.

Over the past decade, we have been developing a suite of low CapEx emission control products and technologies to give our customers an alternative to large capital approaches such as scrubbers. We chose this approach because a large part of the fleet of 1200 plus coal fired boilers that provide approximately 50% of electricity in the US are 40 to 60 years old.

Experts have predicted that up to a quarter this fleet could be forced to shut down if they are required to add scrubbers and FCRs, which can cost $200 million to $300 million per installation. Our approach is to provide equipment costing on the order of $1 million and a chemical that is used continuously which becomes an operating cost to the utility that can be passed to the rate payer and a continuing revenue stream to ADA.

So, let me discuss the new and proposed regulations, and how we see our products fitting into the markets and that we expect the regulations to create. As we anticipated, EPA has advanced on three different MAC standards. New standards for cement and industrial boilers are now final, and the draft for utilities was released last week in a scheduled to be filed this November. In general, all three of these regulations are less stringent than expected, meaning fewer scrubbers and forced retirements while at the same time, creating significant markets for our products.

Let me give you some of our thoughts after our initial analysis of the proposed Air Toxic Rule that was released last week by EPA. The Air Toxics Rule will require over 1200 existing and new coal-fired electricity generating plants to reduce emissions of mercury and other hazardous air pollutants or HAPs. We have concluded that the emission levels proposed for the HAPs will probably not require scrubbers for most of the plants, but instead compliance may be able to be achieved by low CapEx technologies that ADA provides.

The mercury limit of one pound per trillion BTU will require 80% to 90% reduction of mercury from levels in the coal. We are offering three different control technologies capable of achieving these levels of mercury emissions. And we also have products that deal with the other two groups of HAPs for which the rule proposed a numerical limit, acid gases with HCl defined as a surrogate and non-mercury metals with particulate matter, or PM, defined as a surrogate. Air Toxics Rule is scheduled to be final this November and power companies are provided 36 months to be in compliance.

The new MAC rules are expected to create significant new markets for ACI equipment provided by the Company. Activated carbon is effective for control of emissions above mercury and dioxins furans. ADA has been a market leader in providing nearly one-third of 150 ACI systems sold to date to the power industry to meet mercury emission limits on new power plants and existing plants in 19 states where regulations are in effect. The Air Toxics Rule will create a demand for 500 to 700 new ACI systems over the next three years, which would be a market of approximately $500 million. We believe this market will start later this year, and we are already in discussions with some utilities about early fleet wide procurement.

These ACI systems will likely require approximately 800 million to 1 billion pounds of activated carbon to capture mercury. ADA provides activated carbon for the industry through its joint venture ADA Carbon Solutions, ACS, with Energy Capital Partners. The first ACS production plant started up in the summer of 2010 in Red River Parish, Louisiana. During the first quarter of this year, the third and fourth furnace were started up, so the plant has a capacity to produce 150 million pounds of AC per year.

In addition to the mercury market, our AC has been qualified for use in some water applications. We believe the new rules will create sufficient demand over the next three years to sell off the capacity of this first production unit as well as create a need for additional production units. To prepare for this demand, ACS has permitted a second 150 million pound per year production facilities at the Red River plant and is pursuing permits for up to four additional AC plants.

ADA also provides options for reducing mercury with coal treatment technologies. CyClean is our patented refined coal technology, provided through Clean Coal Solutions, that has reduced mercury emission levels below the proposed limit for plants with cyclone boilers burning PRB coals. CyClean also qualifies for IRS Section 45 tax credits of over $6 per ton of coal. We currently have two systems up and operating on four boilers that created over $10 million in revenue during the first two quarters of operation. At this rate, these units producing over 6 million tons of refined coal per year can result in as much as $1 per share in earnings for the Company over the next nine years.

In December, we received a great opportunity when congress allowed an additional year to build and install refined coal facilities. We have ramped up our sales efforts and to date have had meetings with key utilities representing a potential of over 30 million tons of refined coal. As result of this reception, that we have received from the market, we initiated the fabrication of six facilities each capable of producing 1 million to 5 million tons per year. We expect that over the next few months, we will decide to build additional units to meet further demand.

Once equipment is fabricated, we anticipate installation in testing of the first units this summer with the routine operation of some of the units starting in the third and fourth quarter. A second coal treatment technology was licensed by Arch Coal last June to modify its PRB coals at the mine resulting in lower mercury emissions. The licensing agreement provides ADA with a royalty of up to $1 per ton for the premium Arch receives from the sales of enhanced coal. So far, we have shown that we can enhance PRB coal at the mine and achieve mercury reductions when the coal is burned at the power plants. Based upon these results, Arch is planning to send additional train loads of coal to different plants to show the capabilities of this new product that we believe can provide $2 to $4 per ton in benefits to the user.

The proposed Air Toxics Rule could create a market for a significant percentage of the greater than 100 million tons per year of PRB coal that is mined by Arch. The Air Toxics Rule also requires power plants to reduce emissions of acid gases that generate a market for technologies capable of providing trim levels up to 67% of HCl for PRB coals. ADA provides alkylate injection systems to meet this market. These dry sorbent, or DSI systems, are expected to cost $2 million to $3 million for an average sized plant. For the past year, ADA has been demonstrating this equipment for control of SO2 and SO3 on plants burning bituminous, PRB and lignite coals. The DSI approach is also a low cost option for utilities for meeting the Particulate Matter Standard proposed in the Air Toxics Rule because dry sorbents can capture condensable materials that are part of the regulated PM emissions.

In addition to providing emission control technologies for these new regulations, we continue to develop new technologies for further challenges for the coal fired power industry. In the fourth quarter, we began work on a $19 million Department of Energy program to continue development of technology to capture carbon dioxide from coal fired power plants and industrial sources. The project provides funding to advance ADA's commercialization plan for regenerable solid sorbent.

Work on this new project has begun, and we expect to run through 2014 to scale up the technology to the one megawatt level, which is a key step in the technology development process. This contract will not only fund R&D on this process, it will also provide significant contributions to ADA's revenues and margins over the next four years. Those interested in additional details can download tentacle papers and presentations from our websites.

Finally, let me come on the lawsuits that I mentioned earlier. These two lawsuits filed by Calgon and Norit, in an effort to make it difficult for us to enter the AC manufacturing business, has been a tremendous drain on the Company's resources and a major distraction for management; however, we feel these are largely behind us now. So, we can focus our time and energy on the great opportunities we have created.

In December, the suit with Calgon was finalized while Calgon agreed to pay us $7.2 million. On the Norit lawsuit, the legal proceedings and most of the legal expenses are essentially complete, and we should have a ruling from the arbitration panel the next few weeks. We stated from the start that we believed that this suit had no merit. After completion, a four week hearings and two rounds of post hearing legal briefs, we feel even stronger about this position. We will see if the panel confirms this belief. Because this was a confidential proceeding, we are unable to answer any questions about the hearing at this time.

So, in conclusion, we are extremely excited about the current future opportunities for the Company. We have a number of near-term prospects for significant earnings, tremendous growth potential in the next three years as the industry we serve has to comply with the new Air Toxics Rule, and developing technologies for future regulations. Events happening across the world from Libya to Japan are increasing the awareness of the importance of continued use of coal in our energy mix; however, it's important that we reduce emissions from burning coal, and ADA provides the technology to help achieve this goal.

Before handling the call over to the operator for Q&A, I'd like to mention that in addition to being added to the Russell Midcap Index in 2010, we were added to the Ardour Global Alternative Energy Index earlier this month. We are excited about being part of both indices which should enhance our stocks liquidity and exposure to institutional share holders. Also, we are and presenting at the JMP Securities annual research conference in San Francisco on May 9 to 11, and hope to see you there.

Operator, we would like to open this up for questions.

(Operator Instructions) Thank you, our first question is coming from Graham Mattison of Lazard Capital Markets.

Hello, good morning guys.

Good morning Graham.

Just wanted to start a housekeeping question. What do you see for the quarterly run rate of SG&A going forward x-legal charges, starting in Q2 or Q3?

What you should look at, Graham, is that for the quarter we reported what we were at non-routine legal. When you back those out of the G&A that are shown there, that should be a run rate. We will see something higher than that in this 2011 as we are building for the expected growth in the MAC markets here, and we'll be building some staff, and our resource capabilities to meet the growth that we are expecting in the market. But it would be good to look at the fourth quarter less those non-routine legals to get an idea of that.

Perfect. Thank you. And on the mercury control side, on prior calls you had said you had been were working with seven or nine utilities out there with over 100 boilers. Has that changed from late last year now that we have the draft rules out?

Those were some test programs we were conducting at the time. How to qualify, quantify -- all I can say is during last week alone, we had face to face meetings with six utilities. So, we are seeing an urgency of this rule. We are seeing what they had told us before that having the draft out allows them to begin work on this, and be able to pass their costs to the rate payers. So, we are definitely seeing a pick up in interest and business as a result of the draft.

Great. And then on the refined coal, you said that you expect that you would have some of the first of the six units in place later this month. That's moved up from where you had spoken about it previously. Is that correct?

No, if I said that, I misspoke. The equipment won't even be manufactured until May or June. So, this summer will be the first full scale testing in placing these in service, and they will more or less start in that late May/June time frame.

So, you could be generating revenues and finalizing the off take -- not the off take agreements but the tax piece sometime later this year?

Yes. It's a two step process where we first get the go ahead from the utility to come out and start. We are building the generic part of the equipment on these first six systems, but then we have site specific equipment that we have to build and that takes a couple months. So, once we get go ahead from the utilities, we start that design and work, and so then the equipment is installed and operating. And then after it operates and the utility gives us the go ahead, they essentially get a two week look at it. After they give that go ahead, then we put them in contact with the monetizer because most of the contracts, and there is probably half a dozen or so contracts that have to be negotiated between the utility and the monetizer, and that could be a two to three month process. So, the earliest full time operations will probably be third and fourth quarter.

Perfect. I will jump back in queue. Thank you.

Thank you, our next question is coming from Al Kaschalk of Wedbush Securities.

Good morning guys.

Hello Al.

Congrats on this following through on 2010 and I know it was some ups and downs, but things are looking much better, in my view. To that point, a $15 million to $20 million of I think it's revs or earnings on the facilities seems to be increasing a little bit each quarter as you get more details and things are operating. Is there anything else we should be reading into that other than the fine tuning of the tax credit business?

Well, we announced after the first quarter, that there were some starting up the new equipment there is always some fits and starts to get started on that, and then at the end of that first quarter which was the third quarter for us, we were up where we were operating close to 95%, 98% of the coal that the plant was burning. So, what you are seeing in the fourth quarter is the pick up of having got through a number of operational issues. We are producing refined coal representing greater than 95% of the coal the plant uses.

At this point, if it continues like this then what you will see is the fluctuation more or less reflecting the plant's operations. So, you will see higher revenues if its a hot summer or cold winter. You will see little lower revenues in what they call the shoulder seasons which are spring and fall, and then you will also see some impacts in those shoulder seasons. That's when they take their outages, too. So, at this point, on these first two facilities we are operating pretty much at steady state and mirroring the coal usage needs at the plants.

Okay. That's helpful. And then on the six that you are pre-fabricating and 16 by year end, that's all -- the intent there is to qualify for the tax credit, right? So, it's also a reflection of increased positive tone, and related rules that you are hearing from your end market to be able to start this process?

I think the question is the interaction between the extension and the new Air Toxics Rule, and there is a direct connection because the last rule we had to have the equipment up and running by 2009. The primary technical benefit that the utility sees from this is the mercury control. Two years ago the benefits from the mercury control was a theoretical asset or a theoretical benefit that we are providing. As of last week, that benefit is more real. So, this extension could not have happened at a better time with this rule coming out because the utilities are looking at how are they going to comply with it. And with this tax credit, we can essentially provide them mercury control for free. So, that's what's creating the relatively warm reception we are getting in the market.

Then the other item that I wanted to -- you could address on, on carbon solutions I think the number think was $2.9 million loss in the quarter. And could you just -- how we should think about that going forward, and where that stands? And again, it's certainly minor relative to the other positives, but just a little more color on how that should unfold.

Carbon solutions -- it has this operating capacity of 150 million pounds per year, and they are selling into the market and as the demand grows for the mercury control market, they will be able to fill up and be operating at capacity. That's going to follow along with what we are expecting from the Air Toxics Rule as mercury control, emission control, increases over the time frame. This is not a cash flow item for us as we have no obligation to put money in, but we expect that they are going to continue to show some bottom line losses for the next couple of years. Again, not affecting our cash flow until the plant reaches capacity, which will be in 2013, 2014. We'll continue to pick up our equity in the loss of their operations until they get up to a higher run rate there matching the demand for the mercury market.

Okay. And then finally, Mike, given the success you have had here, and there is other alternatives coming down the road, markets, meaning CO2 in particular, what's the capital cost, or what's your capital investments that you are going to be needing over the next six to 12 months, or whatever time frame that you have thought about in terms of the strategic planning?

Well, over the next year most of our -- we are cash flowing our businesses. We were generating our cash from our two existing plants. Our primary capital needs are these first six refined coal facilities, but there is a couple of elements of that. We were near finalization of a line of credit for those units. In addition, as soon as those are operational, if you remember when we got the first two up and operational last June, we received a $9 million payment or the JV bid for these first two units in the form of prepaid rent. So, they quickly turn in to a huge cash return for us once they are up and operational.

The cash needs as we look at it today, the primary cash needs will be in a time frame of expanding additional activated carbon plants if we choose to do that to meet the market. And if we look at timing, this first one took us with once you have a permit we can be up and running in two years, and so the timing for that cash -- if we need to be producing carbon in 2014 to meet this rule, we are going to have to start construction in 2012. So, it would be ramping up in 2012 through 2014 for those uses of cash. And also, Al, just as we mentioned to Graham, we are increasing staff and our resources here to meet the expanded market opportunities we have here resulting from all of these MAC regulations going forward. It's our goal to maintain a market share level there similar to what we have had in the past on the equipment side, and to be expanding in these other areas. As Mike mentioned, the DSI systems are some that the new rule has shown us there are a good market opportunity there. We will be expanding staff, and those aren't really the same kind of CapEx as building a plant, but there's obviously an investment that you make in that.

Right. I guess to your credit and then this is probably a nice problem that I think you will have going forward is you will certainly contain your investment scenarios that are going to drive returns, or you will accelerate those and minimize those where they drag. But it seems going forward, you are going to be looking for other growth markets, which, like I said, is a good problem to have. So, good work and we will look forward to staying in touch here.

Thanks Al.

Thank you, our next question is coming from Ben Kallo of Robert W. Baird.

Good morning guys, Congrats on 2010. Can you talk about the timing of the ACI market, when you expect sales, how utilities are approaching you right now? You said you met with six utilities last week. Are they looking at their fleet-wide rollout of that? And then lastly, and then I will jump back in queue, could you talk about pricing in the market, and how you expect the activated carbon market to develop over the next couple of years? Thanks.

First, on the equipment side, the response to regulation, like everything is kind of in a bell shape curve where you got some utilities that like to get ahead of things, so they don't get bound up in limited resources and limited equipment. So, as I mentioned, we have already had some discussions with utilities where they are looking at working with them on a fleet-wide basis to help address this.

We have heard from other utilities that their thought is let's ignore it for a couple of years and deal with it then, and then you go to the meat of the market in between. So, we look at this as a regulation that they will have to be in place in over 2014. So, I think you will see we will have some contracts this year. The meat of that market for 500 to 700 units will be ramping up heavily in 2012 and 2013 to be able to meet a 2014 deadline.

On the activated carbon side, again, the earliest use for this rule will be in 2014. What we have seen in the past, and we can look historically because we had a mini market in the state rules, and so we can see how utilities responded to that. And what we saw was they like to get the equipment and the carbon as much as six months ahead of the rules, so they can be using it and assure themselves that they will be in compliance. And on the state rules we saw them signing up for take or pay contracts once the rule created this situation where the demand far exceeded the supply. So, they were signing up for take or pay contracts two years ahead of time.

So, we think the contracting for carbon will begin, again like the ACI systems, a little bit this year, and heavily next year because if they aren't signing up for contracts, then the facilities to manufacture the carbon they need two years later will not be built. We think the contracting for activated carbon will begin this year and next year, but the use of it will be more 2014 and beyond.

Thank you our next question is coming from Ian Zaffino of Oppenheimer & Company.

Thank you, this is Brian sitting in for Ian. You talked about using activated carbon for some water applications. Can you go into that a little bit? What type of water applications; waste water, municipal?

I think what we've qualified is taste and odor. The product that we are making out of the plant is primarily a powdered activated carbon. There's some granular capabilities we have there that we have been able to accomplish without adding significant additional capital to the plant. So, that product has been qualified in those markets, and we're bidding on those markets where our products can apply. That's not a major area that we expect to have sales in, but it gives us another outlet for material.

Okay, what type of capacity do you have for granular?

I don't know that we talked about that, but I think it could be 28%.

Okay, great. Thank you.

Thank you our next question is coming from Bryce Dille of JMP Securities.

Good morning, guys. Thanks for taking my call. Just a couple kind of housekeeping-type questions. On the activated carbon facility, can you give us a indication what the utilization level was as of year end, and where you are running today?

I don't think we are reporting those numbers because of our equity pick up there, but I think you will see in the reporting when our 10-K is filed on that, Bryce, in the footnotes, the financials, there will be some revenue numbers for ACS that you will be able to look at, and draw some conclusions from that.

Okay, and then following up on a couple of previous ones on the contracts coming up for re-bid and then on the water sales, are you anticipating some increase on the utilization rate from those end markets, or is it more going to be from new orders that you'd see some more activated carbon demand?

Well, the biggest demand and the demand that will be required to fill this out will be this Air Toxics Rule. So, we are seeing probably the biggest contracts out there are from new power plants that are in the process of being constructed that will need activated carbon once they are up and running. I think the timing on those is late 2011, 2012. Those are some pretty significant contracts. We are seeing some re-bids. We have won some re-bids of contracts. We have also won some contracts where it appears the other producers are sold out, and we have got a couple of contracts where they were unable to fulfill their contracting obligations. Again, it's going to be a slow ramp up. We are not looking at significant cash flows from this until that 2014, 2015 time frame.

Okay. Thanks. And then on any color you can provide on year-to-date legal expense as it compared to Q4?

I would say as we talked about, we expect the run rate in the Q1 of 2011 to be probably somewhat less than the fourth quarter, but still at a higher than, obviously very much higher than, routine rate and then backing off to more routine levels in the second quarter as the arbitration decision, and all that should be coming out here fairly soon. Somewhat less than the fourth quarter and ramping down in the second quarter of this year.

Okay. And then just last question, I see that you recently licensed two new patents for CO2 capture from NETL. Is this going to change the pace of your DOE contracts, or is this going to open up an option to begin commercial pilot programs for CO2 capture with some utilities at this point?

Well, the current $19 million program is to scale up the solid sorbent technology to the one megawatt level. So, we are designing and building this one megawatt pilot plant. In parallel, we were evaluating a number of different options for solid sorbents and these sorbents that we have licensed from DOE are two of the options that will be considered for use in these one megawatt tests that will occur over the next three to four years.

Okay, thanks guys. Congratulations on a good 2010.

Thank you.

Thank you our next question is coming from Kevin McKenna of Stifel Nicolaus.

Hi. Just a question on the section 45 units. You said it takes a couple of months to build the site specific equipment. Does that mean that there is already been companies that are interested in these, and now you are going to be building specific equipment for them starting in the next month or so?

Well, we are running a number of operations in parallel, Kevin. As I mentioned, we have started fabrication of the generic parts for six of those, and that's based on the reception we received in the market. And the marketing process is a pretty complex process. We didn't get word of this until the end of the year, and the meetings we have had to schedule is difficult because it involves so many aspects of the utility. We may have to put together a meeting that includes a CFO, engineering personnel, generation, their tax people, their fuels people, environmental people, plant people. And so, just trying to get this meeting with maybe potentially a dozen different key people at the utility for the next step.

And then the follow-up on that is maybe visiting our first two operating plants. Our customer there is hosting plant visits, and at that point, they could give us permission to send our engineering people. So, we have talked to utilities representing over 30 million tons each of those are in various stages of discussions and visits. And so, based on where we are with those is how we are making decisions that we want to commit to these first six systems, and probably over the next couple of months we may be committing to more.

But we were trying to time those decisions based on the comfort levels we have that we will find homes for these, and probably putting ourselves in a position where we want to err on the side -- you look at the single facility, it might generate--it may cost us $1 million, but it might generate $200 million to $300 million in tax credits. We want to be in a position at the end of the year that we might have $1 million piece of equipment we didn't sell rather than be in a position that if we had one more we could have sold to it to a $300 million facility. We are timing. We are making decisions realtime as we go through this process, and we are trying to optimize the opportunity.

And just a follow-up on that. You said you get the mercury control for free, but also reducing NOx, you're increasing the overall efficiency of the burn, and do those extra savings have much to do with the business? Or is it mainly the mercury control?

That is one of the benefits. We are seeing improved combustion, but because of this new rule -- they have been using these boilers for 30, 40 years. So, improving their combustion at this point is an incremental improvement of some value, but now they are faced with a mercury control rule that could cost them $2 to $4 a ton of coal, and we are providing that for free. So, what we are finding the lead on our sale is mercury control because that's what the utility is interested in.

One last question. So, the size of the facility has a lot to do with the amount of savings? I mean, there is a scale that's not just a straight run savings for everybody?

Well, that's why I quoted it per ton, and so, that's how we look at things. The tax credit is per ton. The savings and the cost of mercury control is kind of a per ton cost. So, all of that economics are around per ton. The only thing that's not per ton is the cost of the equipment. So, I mentioned that our commitment at the JV level may be $1 million per facility commitment here. And then we install that at a power plant and treat all the coal being burned for that boiler. So, that $1 million we could put it on at a plant that might treat 4 million to 5 million tons and that's generating $30 million of your tax credit. If we put it on a plant that's only burning one, it's only generating $6 million of tax credits. So, the equipment is the only part of this whole operation that doesn't scale.

All right. Thank you. I appreciate that.

Thank you, our next question is coming from Chris Owens of Trafelet.

Good morning gentlemen.

Good morning Chris.

My first question, is there the possibility that you could securitize the royalty stream from the refined coal?

You mean sell it as a package? This is going to generate 10 years of tax credits, so I have got a value?

Yes. It seems like an MTB exercise.

Yes, I think that's possible. That's probably something that we might address after this year, after we have got as many of these in place, and now they have a 10 year future to them.

Okay. Great. And I ask because it seems like there will be some more capital needs in 2012 and 2013 as you build up the activated carbon, so that may be a good source of cash for you guys. The other question I wanted to ask is with your JV with Arch Coal, could you give us a road map of what needs to be done, or what's left to be done before you can start generating revenue on a recurrent basis from that JV?

The process on which a power plant tries new coals is to take a unit train, a unit train being 120 to 140 rail cars. So, that's going to be more or less the process that we are going through this year. As we look at the market, they may sell about 30 million tons into states that are already controlling --have mercury regulations. The rest of the market will be to meet this Air Toxics Rule. So, we have successfully shown that we can treat the coal at the mine, send the unit train and get those benefits. And so, now the process is sending them to a number of different plants because our customer is a very much -- yes, it's worked over there, but I haven't seen it work at my plant. So, it's going to be that process of testing it at a plant, and then contracting with Arch for like a five year contract for it. We hope to see a number of these over the next six months, and maybe some revenue starting to flow in the second half of the year.

Okay. Have Arch's customers agreed to taking several train loads, or is it sort of one-offs?

We are in the process of that marketing effort.

Okay. Do you generate revenue from the test, or are those on the house? To get details would be comfortable.

That's one of the questions we are discussing.

Okay, thank you very much.

Thank you our next question is coming from Lynn Kennedy of Lynn Kennedy Investments.

Yes, hello to all of you. I had a couple of questions. One is a follow-up to the earlier question about legal fees, and that's kind of a two part one there. First, are the legal fees expected to return to the approximately normal during the second quarter of 2011, or what will they be? And then the second part of that is given that the first quarter fees will be slightly lower than the fourth-quarter 2010 fees, would you say given the outlook for sales that the net loss, I would assume there is a projected net loss or maybe flat, would that net loss be somewhere in the order or slightly less than the fourth-quarter net loss?

The short answer would be yes, I think. You have combined several items there. I think it's worthwhile to look at what we did in the fourth quarter, to look at reduced legal fees as somewhat reduced from the level shown there. There are other -- a non-routine item included in the fourth quarter was the settlement with Calgon. You would want to subtract that out to look at what you would expect in the first quarter of 2011, but that and more legal fees should give you an idea where we expect to be in the first quarter. And then moving ahead from there, ramping down on those legal fees starting to a routine level that I don't think we will see until the third quarter of 2011 in the legal costs. But I think we have given some numbers that you can look at that from that you will find in the press release as well as the 10-K that will be filed on Monday, I believe.

The 8-K was posted already today.

Yes, that just has the press release in it, and same numbers you can see there.

Yes, okay. Very good. And then the second question was regarding the EPA's laws. Given that we at ADA do have some markets for AC other than those created by the EPA's proposed new rule, if the implementation of those rules is delayed beyond 2011, say for a year, due to politics or whatever , what is the outlook for ADA in terms of anticipated overall profitability for all of ADA?

The rules are going to really dictate on activated carbon cash flows in 2014 and 2015. So, the delay of the rules will not impact us. Our financial situation over the next couple of years is going to be dominated by how many of these refined coal systems we can get up and running this year, which is somewhat independent of rules and politics as well as growth with the Arch Coal, and again sales of ACI systems from early adopters. So, we don't see -- first of all it's not likely that the rules are going to be delayed. You are seeing a lot of noise in congress, but that's all it is, noise. And the response of our customers is they see this as coming. It's real now that it's out of its draft, and some of them are starting the procurement process.

Okay. Then finally a minor question, but you mentioned something about a new company being formed to operate the new AC production facilities, or refined coal. Is that a wholly owned subsidiary of ADA, or if not, what is the structure?

No, this a 50/50 joint venture with NexGen our partner in the cleaned coal or fine coal activities. This was a separate company just formed that operates the two facilities now, and may operate depending on the structure of the additional facilities that we are building, may operate those. So, that's where the manpower for operation of those facilities and the other operating costs end up. This was part of the transaction putting this all together to have this operated by a third party for the lessor it helped fit into the tax requirements there.

Okay. Got it. And is there much of an income stream ADA from that?

It's primarily at cost. I think our pick up was a few $100,000s of income. So, it covers costs plus gets us some fees there. It provides a little cash flow, but it's not all that significant.

Got it. Thank you very much.

Thank you our next question is coming from Dan Mannes of Avondale.

Good morning, and thanks for taking my call.

Good morning.

Couple of follow-up questions, first on the housekeeping front. Can you give us any color, how much license revenue from Arch was included in quarter?

Dan, what we are doing is the $2 million up front payment that they made license, we're amortizing that to income over about an 18 month period. So, that's a primary picked revenue pick up from that. We do have a little bit of service income that's related to some of the testing that's been done there. If we are testing some of the coal and the utility they are at doesn't have mercury monitors on that, we may go out and do some of that. So, there is a minor amount of service revenue that's associated with it. Through 2010 and the bulk of 2011, most of it will be the amortization off of that $2 million upfront payment that they made.

Got it, and then just real briefly on the $0.50-some of earnings excluding items, in that $0.50, do you include or exclude the Calgon settlement?

In that one, it's included for the quarter and the year.

Okay, and what was the contribution from Calgon on -- ?

Calgon, I think I don't have an EPS, but it's shown there on the income statement. The net other income pick up is $6-point-some million there.

Yes I wasn't sure of the taxes, got it. Then switching to refined coal because this is clearly what we are a lot of excitement is around. Can you talk about your market strategy. Are you still -- I don't want to say limited, but is your primary market still sub bituminous burning cyclone boilers?

Yes, it's in cyclone boilers, PRB coals.

And when we look at that market it looks like there is just a tremendous concentration in Missouri and in Illinois. It looks like about 60% of the market opportunity. Is that the market you are targeting, or are you looking more broadly and are you focusing more on utilities that already have state rules, and thus would benefit for the mercury reductions for the next four years rather than just for the back five?

You are right about the concentration, and for that reason we have set up our joint venture operating company in St. Louis because within a three hour drive of St. Louis represents about 60%, 70% of that market. So, we are going after those, but it's not limited to those. We are going out to others that fit that same requirement outside of that. So, we were going after all of that. That's probably be about 60 million ton total universe in that, and as I have mentioned, we have had discussions already with well over 30 million tons.

Right. Just closing the loop on that, given the fact that a big chunk is in Illinois and Illinois has a state rule, do you have more leverage marketing it to the Illinois customer given they will get the benefit on mercury for the next four years even before the MAC comes into play whereas a lot of the other people you are marketing to really don't -- I don't want to say don't need, it's obviously a public health benefit, but don't get a compliance benefit on the mercury side until late '14, '15?

The biggest difference in Illinois is that they have been paying for mercury control for the last year and a half. So, when you say -- I can save you so much money -- it's not theoretical. It's on their income statement, so last year and a half how much it costs. So, you are right. That's a little bit easier sell, but at the same time, our first two customers are not in a regulated state and are enjoying the ability to achieve compliance early. It seemed like it's a big benefit, but so far it's not where we are seeing a huge distinction on the reception we get, say, inside and outside of Illinois.

Okay. And then some of the plants that are cyclone boilers that we see that look like they could be customers already are endeavoring to add scrubbers. Could some of those plants -- would that change the market opportunity at all to the extent that they put scrubbers on and start using Illinois basin or other coals, or is that not an issue from your perspective?

Most of them aren't adding scrubbers, and this new rule indicates they are not likely to add scrubbers. And what we are seeing even with a scrubber in these locations, the economics of PRB is still a better match for them. So, so far we are not seeing that to be an issue.

Got it. Thank you for the color on that.

Okay. Operator, that's all the time we have today. Thank everyone for joining us today, and your continued interest and investment in ADA.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.