Arq Inc (ARQ) 2011 Q3 法說會逐字稿

Greetings, and welcome to the ADA 2011 third-quarter financial results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Devin Sullivan, Vice President of the Equity Group. Thank you, Mr. Sullivan. You may begin.

Thank you, and good morning, everyone. Thank you for joining us today. Before we begin, 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 believe, will, hope, expect, anticipate, intend, and plan, and negative expressions of these words or words of similar meaning. Actual events or results could differ materially from those discussed in the forward-looking statements as a result of various factors, including factors discussed in ADA's filings with the US Securities and Exchange Commission, with particular emphasis on the section entitled Risk Factors in ADA's Forms 10-K and 10-Q.

Listeners are cautioned not to place undue reliance on the forward-looking statements and to carefully examine the information ADA discloses publicly in its filings with the Securities and Exchange Commission or otherwise before deciding to invest in ADA securities. The forward-looking statements made during this conference call are presented as of today's date, and ADA disclaims any duty to update them unless otherwise required by law to do so. A recording of this call can be found in Investor Resources section of our website, www.ADAES.com.

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

Thank you, Devin, and good morning, everyone, and thank you for joining us for the ADA-ES 2011 third-quarter conference call. First, I'd like to discuss the Company's financial performance, and then our President and CEO, Mike Durham, will update you on the Company's recent corporate developments and our future plans. After that, we will open the call for your questions.

Revenues amounted to $13.2 million for the quarter, or 76% more than the $7.5 million in revenues we recognized in 2010. The increase for the quarter is due primarily to increases in our Refined Coal, or RC, segment, with contribution from other segments as well. RC revenues amounted to $9.2 million for the quarter are due to recognition of $6.7 million in rental income from our two operating RC facilities and approximately $2.5 million of sales of refined coal as a result of demonstrating and placing additional RC facilities into service. RC revenues related to the two operating facilities were higher in the third quarter than in the earlier quarters of this year due to increased amounts of coal available for processing at the power plants where the RC facilities operate. On an ongoing basis, we expect these facilities to process approximately 6 million tons a year and to continue to generate between $15 million to $20 million in revenue per year through 2019, based on tax credits produced by their operations. We are currently pursuing the demonstration and monetization of several additional RC facilities as a result of the extension of the placed-in-service date. They're expected to significantly improve future cash flows, as Mike will discuss further.

Revenues from our Emission Control, or EC, segment increased by 21% to $3.1 million in the third quarter 2011, as compared to revenues of $2.6 million in the third quarter of 2010. The revenue increase was primarily due to increased consulting revenues we had recognized from several customers who have initiated evaluation studies to determine how to best respond to the expected regulations. Sales of our activated carbon injection systems continued to be slow, indicative of the power industry's wait-and-see attitude to addressing developing regulations. As of September 30, 2011, we had contracts in progress for work related to our EC segment totaling approximately $3.5 million. We expect to recognize approximately 35% of this amount in the fourth quarter, with the balance to be completed and realized in 2012. We believe finalization of the recently announced Mercury and Air Toxics Standard will accelerate and further expand our markets, likely starting later this year.

Revenues from our Carbon Capture, or CC, segment generated from our DOE and industry-supported development and demonstration contracts increased 109% to $977,000 for the quarter, up from $467,000 in 2010. Work on our $19 million CO2 capture contract increased throughout the quarter and is expected to provide significant revenues for the Company through 2014. We had DOE contracts, including anticipated industry cost share, in progress totaling approximately $16.9 million as of September 30, 2011. We expect to recognize approximately $735,000 of revenues from these contracts during the remainder of 2011 and the balance spread out through 2014.

Our gross margin in the third quarter was 54%, compared to 78% for the third quarter last year. The lower margins this quarter are a result of the inclusion of the refined coal sales that occurred during demonstrations mentioned earlier that occurred essentially at cost, another cost of placing additional facilities into service. When we settle to routine operations, expected by the middle of next year, margins realized in our RC segment for the majority of the RC facility operating costs are paid by the lessee prior to our recognition of rental income. Those are projected to be in excess of 90%.

General and administrative expenses amounted to $2.9 million in the quarter, as compared to $10.5 million in 2010, and include decreasing legal fees associated with litigation, which amounted to approximately $762,000 for the quarter, as compared to non-routine legal expenses of $8.9 million in the third quarter of 2010. We expect non-routine legal costs to continue decrease in the fourth quarter as we resolve the Norit arbitration. During the third quarter, we entered into a settlement agreement with Norit and made a lump-sum payment of $33 million. We also agreed to pay Norit the sum of $7.5 million over a three-year period commencing next August. In October, the arbitration panel confirmed the terms of the settlement agreement, and the associated legal actions have been dismissed.

For the third quarter of 2011, we reported operating income of $3.5 million, as compared to an operating loss of $5.2 million in 2010, with the improvement due primarily to our Refined Coal activities. Below the operating line, we're reporting several items, which include deductions totaling $2.1 million for the quarter, as compared to $2.4 million in 2010, which represents our now approximate 21.3% equity interest and the loss of ADA Carbon Solutions, offset by a minor amount of income from our 50% interest in Clean Coal Solutions services, the company we formed with NexGen to operate the RC facilities for the lessee.

Interest expense of approximately $890,000 related to deferred gain in the RC transactions and the borrowings under the line of credit supporting our additional RC facilities, and a charge of about $2.2 million as result of the final Norit settlement agreement. Below the income tax benefit line, the amount of $3.1 million has been deducted, as compared to $1.9 million for third quarter last year, for the RC income attributable to the non-controlling interest in Clean Coal Solutions. For the third quarter, our net loss was $3.8 million, or $0.50 per diluted share, as compared to a net loss of $5.8 million, or $0.78 per diluted share, in third quarter of 2010.

Excluding the Norit settlement cash payment, cash flow provided by operations was $5.3 million for the quarter, compared to a use of $4.7 million for the same period in 2010. In October, we complete the public sale of 2 million shares of our common stock through a registered direct offering managed by Lazard, Baird, and JMP. Net proceeds of the offering amounted to $28.4 million and will be primarily used to ensure our ability to place as many additional RC facilities as possible in service before the year-end cut-off date, and to improve our working capital to allow us to continue our aggressive response to the increasing procurement activities we are seeing for our ACI and DSI equipment offerings.

Our balance sheet as of December 31, 2011 reports cash on hand of $9.6 million, working capital deficit of $12 million, long-term liabilities of $36.5 million, and shareholders' equity totaling approximately $1.9 million. Those numbers exclude the results of the offering I mentioned just before. Our working capital decreased from the amount shown at June 30 as result of reclassifying certain obligations related to the Norit matter, from long-term liabilities to current, as the terms of the final settlement were finalized, and recording liabilities associated with the RC facilities we are building.

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

Thank you, Mark.

Let me start with a quick update on environmental regulations that create markets for our products for our products and services. The Cross-State Air Pollution Rule, which is called CSAPR, which was finalized in July, requires additional controls of emissions of NOx and SO2 from power plants. Because power plants can start banking emission credits in January, several utilities have already initiated procurement of dry sorbent injection, or DSI systems, for trimming SO2 levels. These systems are expected to cost $1.5 million to $3 million for an average-sized plant. In the third quarter, we conducted demonstration programs of our DSI systems and are bidding on several requests for proposals, or RFPs.

The Mercury and Air Toxics Standard is now scheduled to become final on December 16. This Rule will require over 1,200 existing and new coal-fired electric generating plants to reduce emissions of mercury and other hazardous air pollutants, or HAPs. We believe that the emission levels proposed by for the HAPs will create a significant market for the low CapEx technologies that ADA provides. The mercury limit of 1.2 pounds per trillion will require 80% to 90% reduction in mercury from levels in the coal. We are offering four different low-cost control technologies capable of achieving these levels of mercury emissions, and our DSI systems can address acid gases.

With the final rule rapidly approaching, procurement activity has begun for activated carbon injection systems. ADA has been the market leader in providing nearly one-third of the 150-plus ACI systems sold to-date to the power industry. The Air Toxics Rule could create demand for 400 to 600 additional ACI systems over the next three years, which would be a market of approximately $500 million to $600 million. We are currently in negotiations with a few utilities about fleet-wide sales of ACI and DSI sales. These contracts are likely to be awarded within a couple months after the regulation is final.

ADA also provides options for reducing mercury with coal-treatment technologies. We have refined two technologies provided through Clean Coal Solutions that qualify for IRS Section 45 credits of over $6.33 of coal -- per ton of coal. As reminder, ADA now owns 42.5% of Clean Coal after an affiliate of the Goldman Sachs group paid $60 million for a 15% non-voting equity interest in Clean Coal in the second quarter.

CyClean is our patented RC technology for cyclone boilers. We currently have two systems up and operating on four boilers that created approximately $20 million in revenue and about $9 million in operating income for ADA during the first 12 months of operations. Over the next eight years, these facilities are expected to generate between $7 million and $9 million in net annual operating income for ADA.

Last December, an opportunity to grow this business was created when Congress allowed another year to build and install additional refined coal facilities. We're attempting to take advantage of this opportunity by installing as many new facilities as we can. Thus far, we've installed and operated 12 new CyClean systems at utility sites and are working to place in service three more systems by the end of next week. Our reach goal is to have a total of 20 systems installed by the end of 2011. After initial operation, it takes an average of approximately six months to obtain permits for full-time operation and to complete all the necessary contracts.

We're hoping to get the first couple of the new systems monetized and operating before year-end, with the rest in routine operation in the first and second quarter 2012. If all planned 20 CyClean systems become fully operational, they could generate pre-tax income of approximately $30 million annually for ADA after payments to minority partners for the 10-year life of the tax credits. CyClean is financing the construction installation of the new refined coal facilities with a $15 million line of credit with a commercial bank, internal cash flows from the two existing units, and $7.7 million received to-date in deposits to secure participation in the facilities.

In September, ADA announced it had successfully demonstrated a new patent-pending technology for producing refined coal for use at coal-fired power plants. ADA's new technology, called M45, complements and expands ADA's market for refined coal. During the full-scale test, M45 achieved greater than 20% reductions in emissions in NOx and greater than 40% reductions in mercury emissions, thus demonstrating that the technology also meets the standards necessary to qualify for IRS Section 45 credits. Based on the successful results of these tests, ADA commenced fabrication of six M45 facilities with the intention of securing locations to demonstrate their operational capability to meet placed-in-service requirements before year end. ADA's goal is to place sufficient M45 systems in service to produce in the aggregate 10 million to 20 million tons of refined coal per year once they become fully operational, which is expected to occur in 2012.

This week, we announced the signing of an non-binding term sheet for exclusive license of the M45 refined coal technology to the JV Clean Coal. The expected exclusive license would include a royalty based on a percent of the operating income on future production of M45 RC and prepaid royalties up to $10 million, in addition to our 42.5% distributions from the JV. Under this agreement, the six facilities currently being built would have the potential of producing a total of more than $20 million in operating income per year for ADA for the next 10 years. We believe licensing this technology to Clean Coal enables us to optimize the opportunity to fabricate, install, and in place in service as many systems as possible by year end and then coordinate monetization efforts.

We have established a very aggressive schedule for optimizing the RC opportunities, and we're making great progress getting these systems installed and operating. It also allows us to potentially use some of the facilities placed in service using CyClean to treat larger annual volumes of coal if applied at a different plant using the M45 technology. I think it is important to note that the RC business opportunities are not dependent on any new environmental or tax regulations. The current 10-year tax credits do not require any additional approval by Congress, which provides us with a high degree of confidence that Clean Coal and the M45 technology will generate long-term cash flows.

A third ADA coal-treatment technology was licensed to 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 up to $1 per ton from the premium Arch receives from sale 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 power plants. Because of the push on the Refined Coal systems with the pending year-end deadline, additional tests with enhanced coal have been delayed.

In addition to providing emission controls for these regulations, we continue to develop new technology for future challenges for the coal-fired power generation industry. A $19 million Department of Energy program is supporting the development of our regenerable solid sorbent technology to capture carbon dioxide from coal-fired power plants and industrial sources. The project, which is expect to run to 2014, provides funding to scale up the technology to the one-megawatt level, a key step in advancing the technology towards the commercial process. This contract not only provides the funds -- only funds the R&D, we expect it will also provide significant contributions to ADA's revenues and margins over the next three-plus years.

As Mark mentioned, we successfully raised close to $30 million in a sale of common stock. Debt was not available to us, as the first two Refined Coal facilities were used to secure $15 million in working capital for Clean Coal, and the new Refined Coal facilities would not be available for collateral until they are monetized and cash flowing. Although we expect significant cash flows from refined coal in the first half 2012, we felt it was necessary to increase cash resources immediately in order to prevent long-term significant opportunities -- prevent losing significant opportunities for the Company.

An example of this need for cash comes from our current negotiations with utilities on fleet-wide contracts for ACI and DSI systems, for which a single contract could exceed $20 million. We heard from these customers that they had concerns about our ability to execute on a contract of this size with only a few million of cash available. So we added the cash to bolster our balance sheet to alleviate concerns from both customers and vendors.

Another example of our immediate cash needs is that in September, when we proved the viability of M45, we saw a potential for something that could generate $20 million to $40 million in cash flow for ADA as early as 2012 and over $20 -- $200 million over the next 10 years. However, it required immediately spending -- committing to spend up to $6 million to $8 million to build six facilities. Although we didn't have all that cash on hand, we initiated construction, because any day, we'd risk losing the opportunity, and we began parallel options for funding, raising equity and licensing the technology. Although we did not finalize the term sheet for licensing until last week, the equity raised give us the resources to keep the M45 project on schedule. With the Clean Coal agreement moving forward, we can now take advantage of the tremendous synergy with the JV team and reserve our cash for growth opportunities developing with the pending MAT regulation.

So, in conclusion we have a near-term focus on the RC business, which we believe can produce significant growth in earnings. At the same time, we are demonstrating the capabilities of our new emission-control technologies, adding personnel, equipment, and financial resources to exploit the tremendous growth potential these technologies over the next three to four years, as the industry we serve has to comply with these new EPA regulations. Finally, to position ourselves for continued long-term success, we are developing technologies for future regulations.

Before opening up the call to questions, I would like to point out that we will be presenting at the Baird Clean Tech Conference in San Francisco November 30 to December 1, and we hope to see some of you there. Operator, we can now open it up for questions. We have about 35 minutes to address.

Thank you. Ladies and gentlemen, we now be conducting a question-and-answer session. (Operator Instructions) Graham Mattison, Lazard Capital Markets.

Good morning, everyone. First, a quick question for Mark. On the SG&A, that's come down quite of bit without the legal expenses. How should we think about modeling out if it's moving to 2012, what the go-forward SG&A rate might be for the Company?

As Mike mentioned, and this we've talked about before. We have been adding resources over the last year and will continue to do that to prepare ourselves for the increase in business expected by these -- the MACT regulations and other EPA regulations there. So, I -- not a change from before, but we're saying for modeling purposes, we expect those SG&A amount to $3 million to $4 million a quarter, going forward.

All right. Great.

If I could add to that, Graham, is not to use that as a percentage of revenues, because we expect to see significant increases in revenues from refined coal that won't reflect a percentage increase in SG&A.

Great. That's very helpful. Then on the demand for the ACI systems, do you still -- how do you see consulting revenue going forward? Should the fourth quarter also, contain a similar amount of consulting revenues? Then, we shift over to the spend once the orders start to come in? Or will we see the consulting revenue continue into outer years, adding to the ACI sales?

There'll be some continuation. The backlog numbers that we provided in the release and in the call here, and you'll see you in the 10-Q, relate primarily to consulting contracts. So, we really haven't taken on any new ACI contracts, as those continue to be slow with that wait-and-see attitude. So, I would expect that, that consulting level will probably continue throughout 2012. As there are several of our customers who aren't ready to procure, but with the certainty of the Rule, will be looking for tests out there to say what do we need to do. So, I image they'll stay at a similar level throughout 2012 as we see here in the third and fourth quarter.

All right. Great. Then, one last question on the Arch Coal enhanced coal product. When do you see that -- so, you're going to start that back up in January, once you're beyond the refined coal opportunity, but when can you see that potentially contributing to revenues? What are the next steps that need to happen before we could see the first revenues on sales on that?

Well, the drivers are going to be the mercury regulations. Unlike the refined coal, this is something that they're going to have pay for. So, it'll depend upon the timing of the new mercury MACT, when that's finalized, and set the date there. The other existing market for that is in state programs. What we see on those is that, there's 19 states, and there's a significant market for it, but right now, most of those plants are operating under ACI and activated carbon contracts that were put in place 2, 3 years ago. So, as long as they have take-or-pay contracts, they're not going to consider an alternative technology until those start to expire. So, we think that's probably the closer near-term market, which we may see happen beginning of 2012.

Got it. That's very helpful. I'll jump back in queue. Thank you.

Al Kaschalk, Wedbush.

Morning, guys. Just a follow-up on the refined coal margin, or the overall margin on the Company. Mark, if I heard you correctly, I think you said there were some sales at cost that went through the JV and therefore led the smaller pickup on the margin front, or did I --? Not clear if -- did I not understand that?

Yes, let me explain that. So, as we go out and demonstrate these facilities, part of that is showing that you're in business doing that, and that can oftentimes result in us purchasing and selling back the coal that we processed during that demonstration to the utilities. So, in the third quarter, as part of placing additional facilities into service in the refined coal area, we -- there is included both a revenue and a direct cost of about $2.5 million in there.

So, you'll see it. With that included, if you just did the math on that, that reduces the refined coal margin just by including a plus and a minus of the same amount to about 62%, where if you take that out, the margin is over 85%. So, it's -- we had a similar situation at the end of 2009 when will placed the first 2 facilities into operation. We bought and sold some coal in that manner as well. So, there'll be this little blip, but as you may have noted in my programmed speech there, that we expect that when we reach these routine levels, that we'll -- the margins in refined coal will be over this 90%.

Should we expect some over the next 1 or 2 quarters as you're meeting these deadlines as well, or is this something that's behind you?

Primarily, you'll see it be -- it will be behind us after the fourth quarter, because we'll have to be placing all these units into operation by the end of the quarter. So, we expect that kind of anomaly where we'll be buying and selling coal at cost to primarily be over with the fourth quarter. Yes, now as we've talked about before, as we look at these 20 facilities, part of the thinking in the joint venture is that we may retain 1 or 2 of to generate tax credits for ourselves. So, in those cases, we'll see a cost, but no revenues related to those, but our benefit will come from the tax credits that we generate and will be using to offset our own tax liabilities.

Then, a question driven at more of the cash spend over the next 6 to 9 months. But if I take it step back and hear what you have said about CyClean, and then M45. There are 2 different economics to the Company. So, I'm wondering if there is any type of smaller market opportunity as a result of CyClean versus the M45? Or are you really looking at $30 million pre-tax operating income opportunity on CyClean, and then a $20 million to $30 million number on -- with M45? Could you just talk about that? Then, with that, what spend do you need related to this business over the next 60 days?

Let me provide some preliminary comments, and Mike may add some additional ones there. The M45 technology is really additive to the CyClean. So, this an addition to, as we noted with the -- if all 20 of the facilities are up and fully operational, we would expect those to be adding $30 million a year of net cash flow and net operating income to the Company. On top of that, we look at the M45 facilities where we're attempting to put in a total of 6 facilities there by the end of the year. Those have the opportunity, given the combination of our license fees and our interest the joint venture, where we expect those to be operated now, of generating an additional $20 million a year -- of up to $20 million a year of additional cash flow for us.

Now, from a capital -- a CapEx standpoint, the M45 facilities can be a little bit less than the CyClean facilities. They're in the order of this -- to place them into service and demonstrate them -- they're in this order of $1 million to $1.4 million each to do that. To put them into final operation after we have the contract and as part of moving them into their routine long-term operation, there's another $600,000, $700,000 as we put some permanent facilities in at the utilities where they'll be operating.

So these, as we mentioned in the discussion, these costs are being covered by the $15 million line of credit we have in Clean Coal. The operating cash flows that are coming from the initial 2 facilities and that will be generated by these other ones that we have to expect to be having monetized soon. Then, these up-front payments that we received, both for deposits in a sense now where they're -- the expected monetizers are reserving the facilities for them. Then, as we get to the monetization, the finalization there, they'll be making additional payments on that as well. So, we expect those to cover those capital costs, but we'll be incurring that capital, as we had in the third quarter, throughout the -- into the second half of -- into the first -- second quarter of 2012 as these facilities get placed into permanent operation.

Yes, let me just add a couple things to that. It'll be easier to look back at the end of the first quarter, to see all the different cash flows that are coming in, but once individually begin to be placed in service is that, Mark mentioned the initial deposits we're receiving, but there are significantly higher amounts of prepaid rent that come once they're up full-time monetization. So, that most of these will be way above water by the end of the first quarter. Another issue is the [prepaid] royalties we are receiving from the M45. That puts ADA into a positive cash position on these pretty quickly.

As we -- right now, we are talking about 2 separate opportunities. The CyClean, and giving guidance of about $30 million a year of pre-tax earnings on the CyClean, and another $20 million on the M45. However, as we get into next year, these will start to blur, because one of the opportunities that is created by bringing them both into Clean Coal is that we have now the option that some of the CyClean systems can be used as M45 systems. So, as we were looking at where we wanted to eventually use some of those, it'll -- it may make more sense for us to put them on a larger plant under the M45 technology than the smaller cyclone that they might have been on. So, we'll be able to optimize those, and maybe rather than it being 20 CyClean systems and 6 M45, it may be a different number of both. So, they'll end up being blurred as -- once we get through the end of the year, we'll probably not separate those out and just report total distributions from CCS once we get into 2012.

Is it fair to say, if I may ask a follow-up, that the economics are better on M45 because of the size? Or assuming investment percentages were the same, or ownership percentages were the same, are the M45 economics better?

They're better for 2 reasons. In some cases, we can take them and put them on the bigger plant than the smaller cyclones. So, that's one. The other is part of the licensing agreement, is we get a royalty more or less off the top. It's not quite at the top. It's after all the expenses, the chemical and operational expenses, but we get a payment per ton off the top for the M45, and then, we get our 42.5% distribution. So, from that standpoint, the economics are better. We're still getting a feel on that. As we look at it, we've talked around the CyClean systems being about $1 per ton of pre-tax earnings, and I think we're looking more like $2 a ton on M45 systems.

Thanks you very much, Mike.

Kevin McKenna, Stifel Nicolaus.

I'd to follow up a little bit with what Al had to say. The -- correct me if I'm wrong, but the smaller cyclone systems are going to be 300,000 to 500,000 tons? Is that correct?

That's right. As we look at the cyclones, list the cyclones, they start at the top with the big ones, 4 million to 6 million. By time you get down to the 20th one on the list, you're down into the -- below 0.5 million tons a year.

Can I assume that the M45 facilities could be as large as 4 million to 6 million then?

It's -- they could be that large, using a 3 million to 4 million average in there is probably better number.

Okay. Thanks. Secondly, there's no relationship between the Mercury Rules and the tax credits. Is that correct?

Well, it's -- the utilities know that, that Mercury Rule is coming, and that's one of their interests. For example, the first 2 units that we had operating since June of 2010, they're not required to control mercury. So, they're benefiting by the comfort of knowing they're controlling mercury well ahead of the regulation, as well as they get to share in the economics of the tax credit. So, any potential delays, the utilities know it's still coming, and we're finding plenty of interest for it independent of what's happening in Washington.

Well, thank you. That's all I had.

(Operator Instructions) Michael Weinstein, UBS.

The Mercury Rules as they're coming out now, we're hearing that there might be a loosening of the particulate matter standards and maybe some delays for certain plants under executive authority or under EPA authority. Just wondering if any of that, from what you've heard and what you understand, would affect the demand for ACI going forward?

Well, the PM goes in an opposite direction of what you would think. Basically, what they're doing is there's 2 parts of the PM. There's a what they call a filterable part of particulate matter and a condensible part. What we're hearing is that EPA is going to drop the condensible part, and what that means -- and you've seen it, you're following utilities. I think this week or last week, [Ameren] announced that with them dropping that, they're going to buy fewer baghouses. What fewer baghouses means is that the need for activated carbon actually goes up, that an ESP -- in the existing ESP, they'll need more carbon to get the same level in an ESP than on a fabric filter.

So, to ADA's standpoint, it's -- we prefer it when they don't put in a baghouse, because we get to sell more of our stuff. On the year delay, we -- that's going to be a case-by-case basis. It's based on kind of the accumulation of both the CSAPR rule and the Air Toxics Rule. If you have to put in a scrubber and you haven't started the process and you have to go through the permitting and financing, that 3 years is going to be a very difficult thing to do. However, on the mercury-control side and the DSI side, that is something that you can place an order and have equipment up and operating in a year. So, we'll just have to see. Again, on a case-by-case basis, how prevalent that one year delay is going to be.

Okay. Thank you very much.

Dan Mannes, Avondale Partners.

Good morning, Mike and Mark. Since this is the first call since you introduced M45, could you at least -- for the broader understanding, could you explain just a little bit about what differentiates the actual product or chemical from CyClean? What the addressable market change is since I know the CyClean wants the cyclone boilers. Who are you selling the M45s to?

Well, the difference is in the chemicals. The chemicals for the CyClean was specific to solving a particular problem that only occurs in cyclone boilers. So, this was something, if we used the same chemicals in a different boiler, we wouldn't expect NOx control, for example.

But you would get the mercury, correct?

We are using a common mercury-control technology.

Got it.

So, if they knew NOx control technology, that is -- we've tested it at a single plant. So, we know within the industry that there's a lot of variation plant-to-plant, but it goes to beyond cyclone boilers, and because we haven't tested all the different types, we don't know the limitations of it. The limitation is really time. So, that time we have, we're only going to be able to build 6 of these, we're not really limited on a market size. We can trade some units from the -- that were put in service under cyclones and use this different chemical for these others. Right now, it just opens up essentially the rest of the market.

So, it's not a specific plant type or design that works, that it worked on in the test?

Well, we tested at a single plant, and it worked at the plant. We don't know -- we haven't tested at other plants to say it won't work at another kind of plant.

So, how do you target this, given you have 6 units and you've tested at 1 plant? Are you looking for ones with similar designs to the 1 you tested at, or what are you going after?

We're going after both. We're going after big, is the criteria.

Okay. Quickly on the margin structure, there's 1 common chemical. There's 1 differentiated chemical. Excluding the royalty payment from NexGen and Goldman, the $10 million, will the margin look similar to CyClean on a per ton basis, or is it actually higher?

Because operations include both labor and chemical, in one case, the chemical may be higher and the labor may be lower, but we're still getting a feel on that. Again, working with 1 test. So far, we don't have the data. So, I would say it's more similar, and so the guidance -- all we can give is the guidance of what it means to us, and you can use that $1 per ton for us on the cyclone systems. We think it's going to be about $2 per ton for ADA on M45.

Even after the sharing. So, it is much higher margin, then?

Well, that's because of the combination of the royalty and the distribution.

Right. So, excluding the royalty, would it look closer to CyClean or no?

Yes.

Then, just real quick, was there -- what was the rationale between the royalty to Goldman and NexGen? You gave up 57.5% of the economics for what sounds like about $10 million, and if this thing was going to do $20 million a year over 10 year, it seems like there was a little bit of a give there. What was the strategic benefit or rationale for that?

Well, it does 2 things. One is, I would say this probably tripled the number of systems we can get in place, just because we can take advantage of the synergy of the technical, the financial, the legal team that's putting these in place. We've got a very effective team that's building the cyclone -- the CyClean systems, installing them, operating them, getting them monetized. If we had to do that on our own, we'd have to build up all of those resources within about a one month process, and it's unlikely we could have got 6 in. So, we probably at least tripled the number of tonnage we'll be able to do.

The second is by having them both come out of CCS, now we've got the ability to interchange where we are. So, as we talked about earlier, there may have been a CyClean system that was planned for a 0.5 million ton facility that now, we can move over to a M45 system that's treating 3 million or 4 million tons, of which we'd get almost double the return on. So, it was a very, very easy decision for us to make.

Got it. Thanks for the color.

Chris [Sommers], a private investor.

Hey, guys. Wondered what the value of your NOL is now on your balance sheet?

You'll see the number there. I think it's -- let me look here. The deferred tax assets on the balance sheet there, and it's primarily all that number that you'll see reported on the balance sheet, about $26 million.

Got it. So, if it's next year you guys do $30 million from CyClean and $20 million from M45. Then you have say, $14 million of G&A, just averaging $3 million and $4 million a quarter, and you're at about $35 million, $36 million in pre-tax income. Will you be able to use all that $26 million against that?

Yes, there's no limitations in that $26 million, as far as use. So, it would -- we'd be able to apply that next year. As I mentioned a little bit earlier too, Chris, we're -- within this Clean Coal joint venture, we're evaluating at this point in time the benefit of operating a couple of these facilities and generating tax credits that we can use to offset the obligations, or tax obligations, created by that income as well. So, moving forward, we're expecting that will also be the case, where we retain a couple of those and are able to reduce our effective tax rate from the roughly 35% we have now, down to a lower rate.

Okay, got it. Great. Thanks very much.

Thank you. We have no further questions in queue at this time. I'd like to turn the floor back over to management for any closing comments.

Thank you, everyone, for joining us today and your continued interest and investment in ADA.

Goodbye.

Thank you. Ladies and gentlemen, this concludes today's teleconference.