Arq Inc (ARQ) 2012 Q1 法說會逐字稿

Greetings, and welcome to the ADA-ES reports first-quarter 2012 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, Devin Sullivan of The Equity Group. Thank you. Mr. Sullivan, you may begin.

Thank you, Melissa. Good morning, everyone, and welcome to today's call. Before we begin, I would like to remind everyone that this conference call may contain forward-looking statements within the meaning of Section 21E of the Securities Act of 1934, which provides 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 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-ES's filings with the US Securities and Exchange Commission, with particular emphasis on the section entitled Risk Factors in ADA-ES'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-ES discloses 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 at www.ADA-ES.com.

I would now like to turn the call over to Mark McKinnies, Chief Financial Officer of ADA-ES. Mark, please go ahead.

Thank you, Devin, and again, good morning, everyone, and thank you for joining us for the ADA-ES first-quarter 2012 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 $18.2 million for the first quarter as compared to $8.5 million in the 2011, as an increase of 115%. The increase for the quarter due to increases in both our Refined Coal, or RC, and Emission Control, or EC, segments. RC revenues are reported from the consolidation of Clean Coal Solutions, Clean Coal, our JV with NexGen Resources and an affiliate of the Goldman Sachs Group Inc.

RC revenues amounted to $15.2 million for the quarter, which amount includes recognition of rental income from our two RC facilities of approximately $5.4 million as compared to $6.1 million of rental income from those facilities in 2011. The lower amount is due to less coal burned during the quarter at the utilities where the RC facilities are located.

RC revenues for 2012 also include approximately $9.8 million as a result of raw coal purchases and RC sales made during the quarter at several RC facilities that Clean Coal operated for its own account during portions of the quarter. We expect to lease some of those facilities to others and retain one. Clean Coal reported operating costs of these facilities and retained the tax credit generated from the approximately 268,000 tons of RC produced for its own account during the quarter.

We recently completed the lease on a third facility, which is now operating, and we expect these three leased facilities to generate from $23 million to $30 million in revenue per year now through 2021, based on the tax credits produced by their operations.

As previously announced, we placed in service a total of 26 refined coal facilities in 2011, taking advantage of the extension of the placed-in-service date that was granted in December 2010. Mike will discuss their current status and the significant opportunities for revenues or cash flows that those new facilities can provide.

Revenues from our Emission Control, or EC, segment increased 36% during the quarter. Although bid and proposal activity has increased significantly, revenues from Activated Carbon Injection, or ACI systems, were generally slow, as expected contract awards from the finalization of the Mercury and Air Toxics Standards, or MATS, are still on the horizon.

EC revenues contributed $2.8 million for the quarter as compared to a contribution of $2 million in 2011. The revenue increase in this segment was primarily due to increased consulting revenues of approximately $489,000 from the same period in 2011 due to MATS-driven demonstrations and other work.

Revenues from our Carbon Capture, or CC, segment, generated from our DOE and industry-supported development and demonstration contracts, decreased slightly from $348,000 in the first quarter of 2011 to $282,000 for the current quarter. We commenced work on our $19 million CO2 capture contract in the fourth quarter of 2010, which we expect will provide significant revenues for the Company through 2014. We are presently working with DOE on the budget, schedule and cost share parameters for the next phase of the project.

We are also responding to increased procurement activities for both our ACI and dry sorbent injection, or DSI, systems as a result of the recently finalized MATS. We expect significant increases in revenues from equipment and sales materializing later this year and for the next several years, as most utilities will need to be in compliance by 2015.

As of March 31, 2012, we had contracts in progress for work related to our EC segment totaling approximately $4.6 million, all of which we expect to recognize as revenue this year. We had DOE contracts including anticipated industry cost-share in progress totaling approximately $15.4 million as of March 31, 2012. We expect to recognize approximately $5.3 million from these contracts during the remainder of this year, with the balance through 2014, all of which is dependent on continued DOE funding.

After adjusting out the $9.8 million in RC sales and related coal purchases discussed above and operating costs related to RC produced for Clean Coal's account, which will not continue with respect to any facilities after they are monetized, our overall gross margin in the quarter was 71% as compared to 85% for the same quarter last year. If reported on a stand-alone basis, the RC produced for our own account would result in an operating loss essentially equal to the operating costs incurred. However, we show the benefit of ADA's proportionate share of the claimed tax deductions and tax credits generated from these operations as a reduction to our otherwise reported tax expense.

The adjusted segment profits related to our RC segment still include approximately $680,000 of other costs incurred by Clean Coal as part of its effort to work through permitting and other requirements needed to advance the full-time operations at several other facilities. For the leased RC facilities, margins of approximately 90% are realized in our RC segment, where the majority of the RC facilities' operating costs are paid by the lessor, prior to our recognition of rental income.

Margins realized in our EC segment of 25% for the first quarter of 2012 are in line with expectations for the year. On an unadjusted basis, the first quarter of 2012 overall gross margin percentage of 22% was markedly less than the same quarter last year, due primarily to the low margins on the raw coal bought and refined coal sold during the quarter, as mentioned above. The 2011 margin amount does not include any coal sales that would need to be adjusted out for comparability.

General and administrative expenses amounted to $3.6 million in the quarter as compared to $4.8 million last year. The entire 2011 amount was due primarily to legal fees associated with litigation, which were in excess of $2 million for that period. We expect G&A levels in 2012 to approximate the first-quarter G&A numbers, which include approximately $720,000 from consolidation of Clean Coal.

Research and development expenses amounted to $564,000 for the quarter as compared to $321,000 in 2011, with the increase primarily due to increased technology development efforts in several areas.

The increase in depreciation for the first quarter of 2012 as compared to 2011 is the result of recognizing depreciation on 15 of the RC facilities that were placed in service in 2011, which are located at sites where we expect them to be in long-term operation.

For the first quarter of 2012, we recorded an operating loss of $1.2 million as compared to income of $1.9 million in 2011. Below the operating line, we are reporting several items which include interest expense of $470,000 for the quarter related to Clean Coal's line of credit and interest expense on the deferred gain for income tax purposes related to the Clean Coal lease transactions, and an expense of $284,000 for the quarter related to the accrual of our royalty obligation on certain activated carbon sales we assumed in the settlement of litigation in the Norit arbitration.

We relinquished ownership in ADA Carbon Solutions in the fourth quarter of 2011 and no longer record any equity in their operations.

Also shown below in the income tax benefit line is a subtraction of $566,000 for the non-controlling interest in the income of Clean Coal for the quarter that is not attributable to ADA.

For the first quarter of 2012, our net loss was $1.4 million or $0.14 per basic and diluted share as compared to a net loss of $27.5 million or $3.63 per share for 2011. Cash flow used by operations was $9.2 million for the first quarter of 2012 compared to cash provided by operations of $2.2 million for the same period in 2011.

Clean Coal increased its borrowings under its line of credit to $17.6 million to fund much of the remaining expenditures on the placed-in-service RC facilities. On a simplified basis, the consolidated statement of operations shows an operating loss of $2.1 million (sic -- see press release) for the quarter. Adding back $1 million in depreciation charges included in that amount results in a deficit of approximately $200,000, which, apart from timing considerations with other operating assets and liabilities, is an indication of a burn rate for the first quarter of 2012. We would not expect that rate to increase, but to decrease as more RC facilities transition to long-term operations and we start generating cash flows from those operations.

Our balance sheet as of March 31, 2012 reports cash and cash equivalents of $28.3 million and a working capital deficit of $6.2 million, which, after exclusion of $11.9 million in deposits received for RC facilities and $6 million in deferred revenues, would result in a positive $11.7 million of working capital position.

Long-term liabilities totaled $6.8 million and stockholders' equity totaled approximately $48.4 million at quarter end. Mike will discuss the status and progress on the several opportunities we are pursuing and I would like to turn the call over to him.

Thank you, Mark. Let me start by addressing a concern that I am commonly hearing from some investors these days about the future of coal. I don't want to spend a great deal of time on this, as we do not feel it is a significant issue for ADA and our business prospects. In addition, there are a number of very good research reports available by financial analysts for banks and other investment groups that we believe accurately reflect the view that coal will be a key part of our energy mix for decades to come.

This was a very unusual winter in the US, characterized by near-record warm temperatures across the country. In addition to lower use of energy products for home heating, industry energy usage was down because of the recession. This resulted in an excess availability of both coal and natural gas and reduced prices for these commodities. As a consequence, there was increased use of natural gas and reduced use of coal.

However, because power generation executives make decisions on a 30-year basis and because both the weather conditions and low gas prices are viewed by many in the industry as a short-term issue, we did not see any significant closing of coal plants [build] gas-fired plants.

The impact on our business was reflected in the lower RC produced in Q1 with our first two RC plants, as Mark reported. We expect that this kind of year-by-year and seasonal variability will occur over the next nine years of the tax credit. In the years with colder winters and hotter summers, we will have increased RC revenues, and in years when the seasons are mild, the RC revenues will be reduced.

So let me give you details on our specific business components, starting with our emission control equipment. The Mercury and Air Toxics Standards, or MATS, was made final a few weeks ago, on April 16. MATS requires over 1200 existing and new coal-fired electric generating units to reduce emissions of mercury and other hazardous air pollutants, or HAPs, by April 16, 2015. We believe that the emission levels proposed for HAPs will create a significant market for the low CapEx technologies that ADA provides.

The mercury limit will require 80% to 90% reduction of mercury from levels in the coal. We are offering four different low-cost technologies capable of achieving these levels of mercury emissions, and our Dry Sorbent Injection System, or DSI systems, can address acid gases. We expect that MATS implementation will expand the market opportunity for activated carbon, or ACI, systems to approximately 500 million to 600 million based upon the purchase of 400 to 600 new systems over the next three years.

ADA has been a market leader in providing nearly one third of the 150-plus ACI systems sold to date to the power industry. We are currently in negotiation with a few utilities about fleet-wide sales of ACI systems.

We have also been active in procurement for DSI systems for the control of acid gases to meet both MATS requirements and for enhanced mercury capture. These systems are expected to cost $2 million to $3 million for an average-sized plant, and EPA predicts that about 200 DSI systems will be sold. In the first quarter, we won one DSI contract for approximately $2 million.

We believe that between ACI and DSI systems, we're expecting MATS to generate up to $300 million in equipment revenues for ADA over the next three years. As an indication of progress in the development of this market, to date, we have responded to greater than $130 million in bids for equipment and $6 million in bids for testing services. We anticipate that some of these contracts could be awarded as early as the second quarter.

In addition to ACI, ADA also provides options for reducing mercury with coal treatment technologies. Clean Coal, ADA's joint venture with an affiliate of NexGen Resources and an affiliate of the Goldman Sachs Group, is marketing two different low CapEx technologies, CyClean and M45, both of which reduce emissions of NOx and mercury and qualify for IRS Section 45 credits of $6.47 per ton of coal for the next nine years.

We have been operating two systems on four boilers for nearly two years that created over $20 million in revenue and about $7 million in operating income for ADA in 2011.

In 2011, we designed, built, installed and operated 26 new facilities to meet placed-in-service requirements by year end. We have been moving forward on a number of parallel paths to get these operating on a full-time basis in 2012 and 2013. As we have stated in the past, it takes approximately six months for permitting and contract completion and potentially an additional two to three months if private letter rulings, or PORs, are required to address site-specific operating details.

With progress to date, we currently have a total of five RC facilities operating full-time so that we have doubled our RC production levels compared to 2011 levels. In addition, we are well along on negotiations and permitting on several other units such that we expect that we will be three times the 2011 RC production levels by the end of the second quarter.

We are also in progress -- in the process of increasing the number of companies that we are dealing with to monetize the tax credits. By the end of the second quarter, we expect that we will have closed deals with two or three new financial groups. As more of the RC facilities go operational and operating for longer periods, the technical tax credit risks are reduced. As a result, the financial terms around the deals we are now negotiating are much improved over the initial deals, so that the per-ton profits are expected to be higher on the newer deals.

Because each facility has a separate economic structure, rather than give a site-by-site breakdown, we will be giving guidance relating to the cumulative pretax earnings, or EBIT, run rate for ADA. Based upon the progress with the first 15 units, we expect that our RC EBIT run rate will exceed $25 million per year by the end of the second quarter, and we are comfortable with the guidance that by the end of 2012, expect our RC facilities to be generating pretax income of $50 million per year after payments to minority partners, or $5 per share for the remaining life of the tax credits.

I would also like to remind you that we'd be operating several of the RC facilities ourselves so that we keep the tax credit and, as a result, our corporate tax level should be about 10%.

Beyond 2012, there will be additional upside as we get the remaining units up and running in 2013. For these units, there are a number of possible locations, all different sizes and characteristics, so it is difficult at this early stage to provide explicit guidance. For example, we are holding five facilities as speculation on five very large potential RC production sites. Each of these sites has a different set of circumstances that will require resolving some issues, such as a technology improvement, switch in coal rank or PLR to become viable.

So the guidance we are providing is that there is a potential to double the run rates for RC revenues and cash flows by the end of 2013, which could produce pretax earnings as much as $10 a share.

A third ADA mercury-only coal tech treatment technology is being marketed by the Company to meet mercury requirements currently existing in the 19 states and the MATS requirements in 2015. We believe our intense coal technology provides a benefit to the customer of $1 to $4 per ton of coal burned when used on western coals. US power plants consume up to 600 million tons of western coals per year.

We will be providing enhanced coal through two channels. We have licensed the technology to Arch Coal to modify its PRB coals at the Arch mines, resulting in lower emissions, mercury emissions. The licensing agreement provides ADA with a royalty of up to $1.00 per ton from the premium Arch receives from sales of the enhanced coal. So far, we have shown that we can enhance the PRB at the mine and achieve mercury reductions when the coal is burned at the power plants.

For customers that prefer to have the coal treatment applied on-site at their plants, ADA will provide the technology directly to those power plants. This year, we are planning several demonstrations of the technology, both at the mine and specific power plants.

In addition to providing emission control technologies for these new regulations, we continue to develop new technology for future challenges for the coal-fired power industry. A $19 million Department of Energy program is supporting development of our regenerable solid sorbent technology to capture carbon dioxide from coal-fired power plants and industrial sources. The project provides funding to scale up the technology to the 1-megawatt level. We've just completed the design of the plant and are negotiating the contract with DOE about the next phase of the project to construct and operate the plant.

So in conclusion, between the 26 new refined coal facilities and the new mercury regulation, we are focused on executing on these opportunities that we expect will create significant growth for the Company over the next three years, producing significant cash flows. We are positioning ourselves for continued long-term success and are developing technology for future regulations. Operator, we can now open up the call for questions.

Just before we do that -- this is Mark McKinnies again --it was pointed out to me that was a bit dyslexic in reading some of this -- I want to correct that. In talking about the cash flows for the operations used in the first quarter, I made a statement, and this is the correct statement now.

On a simplified basis, the consolidated statement of operations shows an operating loss of $1.2 million for the quarter. I think I said 2.1, so I got those reversed. When we add back $1 million in depreciation charges included in that amount, it results in a deficit of approximately $200,000, which apart from the timing considerations with other operating assets and liabilities, is an indication of a burn rate. And I went on to say how we did not expect that to increase, but to decrease and move to positive as more RC facilities transition to their long-term operations.

Operator, with that, if you would open it up for questions. Thank you.

(Operator Instructions) Graham Mattison, Lazard Capital Markets.

Good morning, guys. What a difference a year makes. So just quickly, so you've got placed right now 15 of the refined units at their final home. Five of those are running. So you need to finalize contracts for 10 more to get to your guidance for 2012? Is that the right way to think about it?

That is in the right order. If we got all of them up and running, it may exceed that. So it is -- that is the right order of magnitude.

And then looking at your guidance, what is the challenge? What is going to be the biggest hurdle for you to hit that? I guess first, if you could talk about what you've guided for a 2012 exit rate and then also what are the potential challenges and hurdles you'll need to overcome to hit the 2013 guidance.

Well, it's -- again, there is about six parallel activities that have to come to completion for each of these agreements. So if you look at the 10 we are working on and there are six parallel activities, that is 60 things that have to be completed. So they are not necessarily individual or global challenges. It is just that we have about 60 things to do.

So each one of these is down the line in which activities have begun on every one of them, on each of these. And the six activities for things like the permitting, term sheets with the monetizers, completed contracts with the monetizers, contracts between the monetizers and the utility, potential PLRs, PUC approval. So each one of those 10, we will be working on all different phases of them.

So, for example, when we talk about we are comfortable that by the end of the second quarter we will be at a certain level, that is because, for example, one of the ones that is not running, we have closed contracts with the utility and the monetizer, but we don't have a permit. So a huge hurdle is completed there, but we can't operate until we get the permit and a PLR around that.

Another unit, we have the permit, but we are working on a new monetizer. So getting the permit we've completed a major hurtled, but we are in progress on finalizing the deals with the monetizer. Another one, of the six phases, we haven't completed any part -- we don't have the permit, we don't have the contract -- but we maybe a couple weeks away from each one of those.

So as we go down on a case-by-case basis of where we are on all these activities, we can look at when do we think this is going to be up and operating and producing refined coal revenues for us. So it is just a very complex set of circumstances, and so the guidance we are giving is kind of on a quarter-by-quarter basis of how many do we think we will have running by the end of the quarter.

But it seems the challenge is just getting through those hurdles of permitting another pieces as opposed to getting customers or monetizers to agree to be part of the program.

That's correct.

And then could you just give some color in terms of what would get you to your exit rate for 2013? Is it the same sort of challenges, or is it -- you mentioned you are reserving five for a larger utility.

Well, in each one of those cases, the 15 we have now, we know the technology works at that particular plant. And so we are comfortable with it. We've probably already gone through and operated at that plant. We've achieved the emissions reductions. So there is a fair amount of certainty around that.

For some of the others that we will be bringing up, it may be a -- that we will have to modify the technology to meet a particular characteristic at that plant, either a coal characteristic or a plant equipment characteristic, and so we are running R&D on the site to try to overcome that. And if we are successful there, then we will be able to apply it at a much bigger plant than if we applied the technology at a plant that we know for sure it will work.

In other cases, the plant may be considering a coal switch. Our technology works primarily western coals, and they could be burning an eastern coal right now and considering a coal switch at a large plant, that coal switch being driven by the fact that on western coal it is easier to meet some of the MATS characteristics. And also, depending on what happens to the Clean Air Interstate rule, that rule may be more favorable to the western coal. So if they switch at this plant to a PRB, for example, then that opens up the opportunity for us to work there.

And in other cases, it is just there is enough of a nuance that we are going to have to get a ruling through a PLR from the IRS saying can it be applied in this way. So it is something that we are working on that either technically, contractually, or through some guidance over the next six to nine months, we hope to get an answer to know whether these various larger sites will be viable for us to get them up and operating in 2013.

All right, great. That's very helpful. I'll jump back in queue. Thank you.

Ben Kallo, Robert W. Baird.

So thanks for the guidance. I was wondering because of the pass-through revenue of some of the coal if you guys could ever provide revenue guidance. Because I think numbers are kind of all over there, and I would just like to put this in line.

Yes, I think we will be able to, and this year, it will be somewhat unusual. As I noted for the first quarter, there were several facilities that we operated that we don't expect to be operating for their long-term as we are operating them and taking advantage of the credits while we can because that is a good deal for us, although we expect to monetize that facility with someone else.

I think once we get through this year and finish with the monetization and get an idea of where we are at next year, we will be able to line out the revenue numbers there, both from the rental incomes that we are expecting and then those ones that we will be operating for our own account. During the next six to nine months, though, that will be difficult; as Mike has pointed out, we are at various stages with these and they move at different speeds, and all the plants have different coal (inaudible) processes, where also there is lots of variables that will impact this year.

Okay, great. And then as far as the systems that you guys -- let me just characterize it as kept in house -- to capture the tax credits yourself, what was the decision to keep the first two to yourselves rather than placing them out with someone else and monetizing them?

There is two parts of that. In one case, it is our intention to try to keep about one in five of these. Because as we look to the calculation on optimizing the financial benefits of this, if we can do about one in five, then we are offsetting the paying the federal taxes on the other four. So in some cases, it is intentional. We are operating it. We plan to operate it continuously.

On other cases, it may be -- for example, we have one plant right now that we got the permit ahead of the monetization contracts. So our choice is to not do anything and wait for the monetization, but then we are losing financial benefits of that facility until it is done. So what we've decided as a group is if we get to a point that we've got permitting approval and plant approval to go ahead and operate, let's start that process, keep those tax credits ourselves for the first few weeks until the monetization occurs. And then we are getting the benefits of those tax credits and then once the monetization comes in, we will have the permanent monetizer.

So it is all a timing issue, and I think that is where Mark was referring to. It is going to be difficult to provide guidance over the next several months because a lot of these will be in transition. But hopefully by the end of the year, there will be a very distinct basis, that we are operating these particular units and the rest of the units we are monetizing.

Great. And then the commentary about having several different monetizers that you are working with, does that help you on -- maybe it seems obvious -- but does that help you on your economics to the upside?

Yes, because when we find the deal with -- where we sold a 15% interest to Goldman Sachs, that gave them the rights to a certain amount of tonnage under a certain monetization rate. So now that we are completing that and offering up additional units to other groups, we are allowed to compete those and take advantage of the fact that, as I said, as these facts come out -- and the facts being now that we've operated for two years at two plants; that takes away some technical risk -- what we are seeing are PLRs coming out on refined coal. We are seeing groups that are going through audits on refined coal. Each step of that way, that becomes less and less of a risk.

And obviously, with less risk, they are going to pay more for those tax credits. And we saw this in the old Section 29 tax credits, that the rates of return increased as time went on, so we will be able to take advantage of that.

Okay. And then just two more. First of all, have you seen any pushback from any of the PUCs that you are trying to get systems through? And then also, have you had any question marks around IRS rulings? I know you guys were going to do some letters to the IRS.

On the PUCs, actually, we think it could actually go the other way. Instead of it being something chancy, now that we are getting more and more units around in a region, if you were a PUC and you are looking at a utility that is doing something that is going to produce a -- essentially getting free mercury control for its ratepayers, as well as $1.00 a ton of payback, so if you are the only plant in the region that is not taking advantage of that, they are going to look negatively upon not using it. So it is something that is very favorable to the ratepayer. So that is not a problem.

We have filed letters to the IRS on some site-specific characteristics. We have not received any feedback from those. They will be published when the IRS rules on them.

Okay. And then my final one is this number that you printed for your bids for equipment seems pretty high. Can you just talk maybe about how that accelerated throughout the year (multiple speakers)?

It really goes back to probably -- I think the bid activity started about August last year, when they saw the rule coming in, [briefly] in November and stretched out to December, that some utilities -- because the procurement process itself can be up to a year long, so they started that early. So I'd say maybe 30%, 40% of that was before the rule was final, and the rest as after the rule was final.

Great. Thanks for all the color, guys.

Steve Kruger, Foresight Investing.

I know that you relinquished your equity interest in the carbon solutions AC business down in Louisiana. But I'm curious if you could comment on your prospects to renew your participation in the activated carbon business as more and more of the ACI systems come online and the demand for activated carbon ramps up.

Thanks for the question. So what we did in that negotiation, we maintained our right for a 50% investment in future production of activated carbon. So the timing on that investment would relate to when that investment would have to be made.

So what we are seeing right now is that they are buying the equipment today. That's the first thing they do, and that is the procurement activity. They will not need the activated carbon until 2015 to meet the rule. So the expansion of the activated carbon market will be a 2015 issue, of which that means you will have to be starting to build in 2013. So that opportunity will arise as we see the market growth for activated carbon in a 2013 timeframe.

Okay, and if the sales of ACI systems and the demand for AC meets the potential that you've described in the past, do you still see a need to, or likelihood of wanting to build another several lines, AC lines?

If that market plays out like that, we see that as a very profitable business that we may want to participate in. And that is why as part of our negotiation, we kept our -- that was a key point for us, to maintain our ability to invest in those future productions.

Okay, great. One more question. Who are your principal competitors in the sale of ACI systems?

It is about 10 different companies that primarily provide equipment that handle powders. So we kind of come at this as a mercury control technology company, and we compete with companies that just provide equipment that feed powders, that may know nothing about mercury control. So there is no major player in that group.

So it is just a matter of, in some cases, we will be able to sell our equipment based as part of a total mercury control package. In other cases, where the utility feels like they are just buying a commodity piece of equipment, like a pump, we probably won't do well with those customers.

Okay, so based on what you've said in the past about your 33 or so percent market share, that would make you by far the number one market share player in the ACI space right now.

We have been the market leader in that, and we expect to maintain that.

Okay, great. Thanks very much. Keep up the good work.

(Operator Instructions) Kevin McKenna, Stifel Nicolaus.

Congratulations on the quarter. First question goes back to one of the other questions that was asked. You said that you had everything in place but the long-term air control permit. Is that correct? Or the pollution control permit -- pardon me.

Each of these is different, and in one case, we have contracts in place, but we will need a PLR and the air permit.

Okay, so the fact of getting the utilities to sign up for these is something you've done in at least a couple of cases at this point then, correct?

We've got several that are moving forward with it, so it is not a matter of -- it is just a matter of negotiating those contracts. They would not be spending the time or having allowed us to install the equipment at their plant unless they were interested. So that is not the limiting factor. It is a matter of trying to get all the contracts in place and done.

And again, this is about a $100 million to $200 million contract. Each one of these, over the 10-year life of the tax credit, involves three parties. So it is, again, a very, very difficult set of contracting. And instead of it being cookie-cutter, you do the first one and the next one is easy, the second one may involve different a monetizing group and a different utility, so it is like starting all over.

Good. And the second question is what tonnage, just for review, did you -- does Goldman Sachs have the right of first refusal on?

I think in the language, it is 12 million tons, in the sale agreement.

Okay. And if you want you can use them or you can use other people, correct?

That is correct. Our intent -- we are working with two or three other groups right now.

Okay. And just a couple of weeks, going on last quarter's call, you were guiding towards $2.00 in cash flow exit by the end of the second quarter. Did I hear you say that that might be closer to $2.50 now?

Well -- and again, we are talking run rates. So we think by the end of the second quarter we will be operating at a run rate of about $25 million EBIT.

Okay. And as -- the last question, as you monetize these units yourself, does that -- go through how that impacts your profitability as well as your revenues one more time.

Let me give you an idea. So most of the guidance you hear is around the EBIT for ADA, because there is -- it is so complicated, some of the profits from the JV we show, for example, as a revenue and then we pay out below the line. The most complicated part -- actually, it's pretty simple, but it hides a lot of other things -- are what happens when we operate these units.

And so let me just give you an idea of the magnitude of it, that if we are talking on the order of, say, 50 million tons that we hope to have done with these 26 units, if we are keeping one in five, that means we are going to be doing 10 million tons. If we do 10 million tons, that means we are buying delivered coal that could be $40 to $50 a ton per year and selling it. So that means there could be -- 10 million tons on $40 would be $400 million of additional revenue. But then we are selling it, so there's expenses. So there could be $400 million of additional expenses that have nothing to do with profitability.

So that is why Mark said we will probably provide some guidance on -- we have to record those revenues and expenses, but we will also show you what it would look like without that. Because that will give you a better indication of how the Company is doing.

Great. Thank you.

Jim Gentrup, Discovery Investment Research.

I didn't catch how many of the RC facilities that you are operating full-time permanently right now.

How many -- we are operating five.

I mean just for your own -- just for yourself, that you're --

All right.

Capturing the tax credits.

Okay. Of the five, three of them are fully monetized, one of them we expect to be monetized in the next several weeks to a month, and one we will keep for ourself.

Right. So just right now, one is -- the answer would be one then you're planning to keep for yourself for permanent.

Yes.

And that number will increase to two by the end of this quarter?

It depends.

All right.

You know, it is -- there is a possibility that we will close on another one that we will intend to run for ourselves.

The only reason I asked that is because of the 20% rule that you are talking about and getting --

But again, as we are moving through this year, we are going to end up probably on a few of these where we start operating them ourselves. And they are bigger units, so we will create a fair amount of refined coal if we start operating for the first month ourselves, and that will feed into a total that may be different than one in five.

But as we look through our list, we have an idea on which ones we expect on a long-term basis that we will be operating.

Okay. And then the $23 million to $30 million per year that you mentioned, Mark, I think in your prepared comments, that was in regards to -- I guess fill in the blank. Again, I'm not sure what that was referring to. You said based on tax credits, so I'm assuming you are referring to the ones that you are operating yourselves.

Yes. Jim, that relates to the three that we have leased that, as Mike mentioned, are monetized now. So those three, the guidance on those is that we expect over the term of the life of the tax credits that they will be generating this $23 million to $30 million a year of rental income for us.

Okay, so that is referring to the ones that you already have a monetizer with then. Okay.

Yes.

And that would be -- the three times that you are talking about -- one more question -- the three times you're talking about by the end of Q2, that is -- you are comparing that with your 6 million tons that you did last year, approximately. That basically it is -- the run rate would be up to $18 million. Is that the wrong way to look at it? Is that the right way to look at it?

Yes, so there is two pieces, where we are also saying that could be $25 million.

On the -- that is on the dollar basis, on the run rate dollar basis.

Right, exiting the quarter at that run rate, yes.

Okay, all right. And then your total -- just a real quick question -- you had ACI revenue but you didn't have any DSI revenue, right, in the Q2.

There was a small amount of DSI. Those are combined in our EC, or Emission Control, segment. So as we've noted, there was one DSI contract that we signed that we are executing on. That did add not an overly significant amount to the revenues for the quarter, but there are some DSI revenues in there.

My estimate or my numbers also showed about $1.4 million of consulting revenue. Is that pretty close?

I think that's about right. I don't have those numbers in front of me to give you a better number on that. But you will see those -- some further description of that in the 10-Q that will be filed this Thursday.

All right. Thanks, guys. That's all I have.

(Operator Instructions) Graham Mattison, Lazard Capital Markets.

Just a question on the enhanced coal. Can you give a sense of how the tests have been going at the various plants so far? And then how would putting the treatment plant on the site of the utility change any of the economics, as opposed to treating the coal at the mine mouth of an Arch mine?

On the first part, we have several tests in planning, but nothing completed this year so far. On the licensing, the licensing to Arch is only for the mine application. So if we apply it at the plant, all the economics go to ADA.

Okay, great. And then in terms of -- so more tests planned later this year, but is it just a matter of you need to wait until an outage during the summer? And when will these tests go -- happen? Is that going to be more towards the second half or just sort of spread throughout the year?

I think they will be spread throughout the year. We do not need an outage. So a lot of times -- anything you do new at a plant, you have to go through a permitting process. So even once we get the utility saying yes, it then has to go through permit modification, temporary permit modification, so it is those. So we see these spread throughout the year.

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

Thank you. Gentlemen, there are no further questions at this time. I would like to turn the floor back over to management for closing comments.

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

Thank you. With that, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.