Arq Inc (ARQ) 2012 Q2 法說會逐字稿

Greetings and welcome to the ADA-ES reports second-quarter 2012 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). 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, you may begin.

Thank you. 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, 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 Form 10-K and Form 10-Q for the second quarter.

Listeners are cautioned not to place undue reliance on the forward-looking statements and to carefully examine the information in ADA-ES discloses publicly in its filings with the Securities and Exchange Commission or otherwise before deciding to invest in ADA-ES's securities. The forward-looking statements made during this conference call are presented as of today's date and ADA-ES disclaims any duty to update them unless otherwise required by law to do so.

A recording of this call can be found in the Investor Resources section of our website, www.adaes.com. Now I'd like to turn the call over to Mark McKinnies, Chief Financial Officer. Mark, please go ahead.

Thank you, Devin and good morning, everyone, again and thank you for joining us for the ADA-ES second-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 $52.5 million for the second quarter as compared to $7 million in 2011, an increase of over 600%. The increase for the quarter is due primarily to increases in our Refined Coal or RC segment, but we also reported increases in our Emissions Control or EC segment. RC revenues are reported from the consolidation of Clean Coal Solutions, LLC, Clean Coal, our joint venture with NexGen Resources, an affiliate of the Goldman Sachs Group Inc.

RC revenues amounted to $48.4 million for the quarter, which amount includes the recognition of rental income from three RC facilities of approximately $10.6 million as compared to $4.6 million from the two facilities in 2011. The higher amount is due to both more coal being burned during the quarter at the utilities where the RC facilities are located and the addition of a third leased facility that commenced operations at the end of March this year.

RC revenues also include approximately $37.7 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 the majority of those facilities to others and expect to retain one facility for our own use. Clean Coal recorded the operating costs of these facilities and retained the tax credits generated from the approximately 1.2 million tons of RC produced for its own account during the quarter. We expect the three leased facilities that were operating at the end of the second quarter, and an additional facility that was leased yesterday, to generate between $29 million to $36 million in revenue per year now through 2021 based on tax credits produced by their operations.

As previously announced, we placed in service a total of 26 additional RC facilities in 2011 taking advantage of the extension of the placed in service [statements] granted in December 2010. Mike will discuss their current status and provide -- and significant opportunities and cash flows that those new facilities can provide.

Revenues from our Emissions Control or EC segment increased 132% during the quarter. Although bid and proposal activity has increased significantly, revenues from activated carbon injection, ACI systems were generally slow as expected contract awards from the finalization of the Mercury and Air Toxic Standards or MATS rules are still on the horizon.

EC's revenues contributed $4 million for the quarter as compared to a contribution of $1.7 million in 2011. The revenue increase in this segment was due to increased revenues in both equipment sales and consulting services. Revenues from our carbon capture or CC segment generated from our DoD and industry-supported CO2 development demonstration contracts decreased from $569,000 in the second quarter of 2011 to $195,000 for the current quarter.

During the quarter, we commenced work on the fabrication and construction phase of our $20.5 million CO2 capture plant project, the contract for which was previously announced in the fourth quarter of 2010. We expect the project to provide significant revenues for the Company through 2014.

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 and we expect significant increases in revenues from equipment sales materializing later this year for the next several years as most utilities will need to be in compliance by 2015.

As of June 30, 2012, we had contracts in progress for work related to our EC segment totaling approximately $4.5 million, which we expect to recognize as revenue this year. We had DOE contracts, including anticipating industry cost share in progress totaling approximately $15.2 million as of June 30, 2012. We expect to recognize approximately $5.1 million from these contracts during the remainder of 2012 and the balance through 2014, all of which is dependent on continuing DOE funding.

After adjusting for the $37.7 million in RC sales and related coal purchases as discussed above, and operating costs related to RC produced for Clean Coal's account, which will not continue with respect to any facility after they are monetized, our overall gross margin in the quarter was 81% as compared to 74% 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 equivalent to the operating costs incurred. However, we show the benefit at 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 cost of revenues related to our RC segment also includes other costs incurred by Clean Coal as part of its efforts to work through permitting and other requirements needed to advance the full-time operations at its several other facilities. For RC facilities that are leased, margins of approximately 85% 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 23% for the first half of 2012 are in line with expectations for the year. On an unadjusted basis, the second quarter of 2012 overall gross margin percentage of 14% was markedly less than the same quarter last year due primarily to the low margin 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 for comparability.

General and administrative expenses amounted to $4 million in the quarter as compared to $6.8 million last year. The higher 2011 amount was due primarily to legal fees associated with litigation, which were in excess of $1.5 million for that period. We expect G&A levels for the remaining six months of 2012 to approximate the amounts realized the first six months of the year.

The G&A amounts for the first six months include approximately $4.2 million from consolidation of Clean Coal. Research and development expenses amounted to $618,000 for the quarter as compared to $375,000 in 2011 with the increase primarily due to increased technology development efforts in several areas. The increase in depreciation for the second quarter of 2012 as compared to 2011 is primarily the result of recognizing depreciation on 15 of the RC facilities that were placed in service in 2011, which are located at the sites where we expect them to be in long-term operations.

For the second quarter of 2012, we recorded an operating income of $1.6 million as compared to a loss of $2.2 million in 2011. Below the operating line, we are reporting several items, which include, one, interest expense of $431,000 for the quarter related to Clean Coal's line of credit and interest expense on deferred gain for income tax purposes related to the Clean Coal lease transaction; two, an expense of $469,000 for the quarter related to the accrual of our royalty obligation on certain activated carbon sales we assumed in the settlement of litigation and the Norit arbitration.

We relinquished our ownership in ADA Carbon Solutions in the fourth quarter of 2011 and no longer record any equity from their operations. And income tax expense of $1.3 million. Although Clean Coal generated significant tax credits for the quarter and our share of those credits is in excess of $3 million, authoritative accounting literature requires us to record an interim tax expense for a benefit based on an estimated effective rate for the entire year. We may revise the estimated rate quarterly as actual results are finalized.

Given our expectations of significant income in the balance of the year in our portion of Section 45 tax credits generated thus far and over the next several months, as of June 30, 2012, we are estimating a negative effective tax rate for the year. Applying that negative rate to the year-to-date loss for the second quarter results in a tax expense for the quarter of approximately $1.3 million when one would logically expect to benefit due to the tax credits generated during the quarter. This is a good math example of when multiplying a negative with a negative will result in a positive.

Also shown below the income tax expense line is a subtraction of $2.2 million for the noncontrolling interest in the income of Clean Coal for the quarter that is not attributable to ADA.

For the second quarter of 2012, our net loss was $2.6 million, or $0.26 per basic and diluted share, as compared to a net loss of $2.3 million, or $0.30 per share, for 2011. Cash flow used by operations was $4.4 million for the second quarter of 2012 compared to cash provided by operations of $3.8 million for the same period in 2011. Clean Coal increased its borrowings under its line of credit to $18 million to fund much of the remaining expenditures in the placed-in-service RC facilities.

Our balance sheet at June 30, 2012 reports cash and cash equivalents of $23.1 million and a working capital deficit of $9.5 million, which after exclusion of the $11.9 million in deposits received for RC facilities and $3.9 million in deferred revenue could result in a positive $6.3 million working capital position. Long-term liabilities totaled $4.3 million and shareholders' deficit totaled approximately $13.7 million at quarter-end after reclassifications of temporary equity of the noncontrolling interest in the Goldman Sachs Group affiliate in Clean Coal.

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

Thank you, Mark. Let me start by addressing concerns about the current viability and future of coal by highlighting a couple of recent events. First, after experiencing reduced coal usage in the first quarter, the plants where our Refined Coal facilities are located are currently burning coal at rates 25% higher than their 10-year annualized averages in spite of continued availability of cheap gas.

Secondly, on July 20, the EPA announced that they will revisit the mercury standard for new power plants. This was done to provide a greater certainty for up to 11 new coal-fired power plants that already have their permits and will open the door for them to begin construction. The fact that there are a number of companies ready to move forward to build multibillion-dollar new coal-fired power plants demonstrates that there are many who still consider coal to be a cost-effective solution for power generation for the next several decades.

Let me now give you details on our specific business components starting with our Emissions Control equipment. The Mercury and Air Toxic Standard, or MATS, was made final this past April. The MATS requires over 1200 existing and new coal-fired electricity generating units to reduce emissions of mercury and other hazardous air pollutants or HAPs by April 2015. We believe that the emission levels proposed for the HAPs is creating a significant market for 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 control technologies capable of achieving these levels of mercury emissions and our dry sorbent injection or DSI systems can address acid gases.

After years of affirmation by the courts, we believe the MATS rule will remain the law even if there is turnover in the White House. It should be noted that MATS is the result of the Clean Air Act, which was first passed under the Nixon administration and later amended in 1990 under the Bush administration. In EPA's July 20 announcement referenced above, they reiterated that the standards for the 1200 existing units would not be impacted because they were sensible, achievable and cost-effective.

I would also like to point out that ADA strongly supported the decision to modify the mercury limit for new power plants and played a key role in two of the successful industry petitions to EPA. We expect that the MATS implementation will expand the new market opportunity for our activated carbon injection or ACI systems by approximately $400 million to $600 million based on 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 AC systems sold to date to the power industry. We are currently in negotiations with a few utilities about fleetwide sales of ACI systems.

As previously announced, ADA is in the process of purchasing the assets of Bulk Conveyor Specialist Inc., a leading privately held fabricator and supplier of DSI systems and other material handling equipment and Bulk Conveyor Services Inc., which provides testing and related services, collectively BCSI. With the planned acquisition of BCSI, we now expect to be in a strong position to be the market leader for DSI systems for control of acid gases to meet the MATS requirement 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.

Between ACI and DSI systems, we are expecting the MATS to generate up to $300 million in equipment sales for ADA over the next three years. As an indication of the progress and the development of this market, to date, ADA has responded to greater than $160 million in bids for ACI systems, $94 million of which from this calendar year alone. To date, the contracts have not begun to be awarded on the schedule we had expected, but we believe that once we see the first couple orders from key large utilities, the rest of the market will begin to flow.

In addition to ACI and DSI, ADA also provides options for reducing mercury emissions with coal treatment technologies. Clean Coal, ADA's joint venture with an affiliate of NexGen Resources, an affiliate of the Goldman Sachs Group, is marketing two different low CapEx technologies, CyClean and M-45, both of which reduce emissions of NOx and mercury and qualify for IRS Section 45 tax 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 and created over $20 million in revenue and $7 million in operating income for ADA in 2011 and added a third system in March of this year. In 2011, we designed, built and 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 operational on a full-time basis in 2012 and 2013.

This complex process involving numerous complicated contracts between three parties involved in the transaction and approval from multiple regulatory agencies is taking longer than we would like. However, we are making significant progress towards our year-end announced goals. Here are the highlights. We are currently operating seven facilities treating coal from 14 boilers that in the aggregate average more than 20 million tons per year.

Of these seven RC facilities, four facilities treating in aggregate of 11 million tons of coal per year are fully permitted and monetized, including a new one that the monetization contracts were closed on yesterday. Three of these are monetized by our initial tax financing partner and a fourth with a new financing partner. Recent coal usage on these RC units is up, which is indicative of the higher energy demand during the hot summer months.

Two non-leased facilities treating an aggregate of 4 million tons of coal per year are currently operated by Clean Coal and generating tax credits on its own. These units are also running at elevated levels of coal utilization. ADA expects that Clean Coal will lease these two facilities by the end of the third quarter, including one to a third financing partner.

The seventh RC facility is expected to be operated by Clean Coal for the long term to generate tax credits on its own. Clean Coal has finalized monetization and other contracts for an eighth RC facility treating 3 million tons of coal per year. The financing partner is awaiting a private letter ruling or PLR from the Internal Revenue Service and Public Utility Commission approvals before full-time operation can commence. These items are expected in the next few months.

With eight RC facilities operating, we will be producing about 23 million tons of RC per year based upon historical usage at these plants. Clean Coal is negotiating to monetize several additional RC facilities and expects to be producing up to 30 million tons by year-end. Because each facility has a separate economic structure, rather than give a site-by-site breakdown, we will be giving guidance related to RC segment income run rate.

Based upon the progress with the first 15 units, we expect that by end of 2012, RC facilities will be generating on an annual basis segment income of $50 million per year after payments to minority partners, or $5 per share for the remaining life of the tax credit.

I would also like to remind you that we will be operating several of these RC facilities ourselves so that we keep the tax credit and as a result, our corporate tax level should be about 10% looking forward through 2021.

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 of which -- all with different sizes and characteristics, so it is difficult at this early stage to provide explicit guidance. For example, we are holding five facilities to be available for 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, switching coal rank or a PLR to become viable.

We have recently reported progress on some of these future units in that we have expanded use of the two RC technologies to both Gulf states and North Dakota lignite. We are also seeing some promising results on bituminous coals that potentially could lead to further expanding of viable sites. So the guidance we are providing is the potential to significantly increase the run rates for RC revenues and segment income by the end of 2013.

A third ADA mercury-only technology, coal treatment technology known as enhanced coal, is also being marketed by the Company to meet mercury requirements currently existing in 19 states and the MATS requirements in 2015. We believe our enhanced coal technology provides a benefit to the customer of $1 to $4 per ton of coal burned when used on Western coal. US power plants consume up to 600 million tons of Western coal per year. We will be providing enhanced coal through two channels. We have licensed the technology to Arch Coal to modify its PRB coal at Arch mines resulting in lower mercury emissions.

The licensing agreement provides ADA with a royalty of up to $1 per ton from the premium Arch receives from the 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 the power plants.

For customers that prefer to have their coal treatment applied on site at their plants, ADA will be providing the technology directly to the power plants. This year, we are conducting several demonstrations of the technology both at the mines and at specific power plants.

In addition to providing Emissions Control technologies for these new regulations, we continue to develop new technologies for future challenges for the coal-fired power generation. In the second quarter, we announced the Department of Energy approved continuation of our $20.5 million program supporting development of our regenerable solid sorbent technology to capture carbon dioxide from coal-fired power plants and industrial sources.

We have initiated the fabrication and construction phase of the 1 megawatt CO2 capture pilot plant. The plant pilot will be installed under Southern Company's subsidiary, Alabama Power, plant Miller, outside of Birmingham, Alabama. Southern Company is co-funding the project with other participants.

So in conclusion, between the 26 new Refined Coal facilities and the new mercury regulations, we are focusing 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 technologies for future regulations.

Before moving on to questions, let me mention a couple of events, which will occur over the next two weeks. Tomorrow, I am scheduled to present at the Jefferies 2012 Global Industrial A&D conference in New York at 11 a.m. Eastern time. A copy of the slides that will be used at this event will be available via the Investor Information section of ADA's website, www.adaes.com and will also be filed on a Form 8-K with the Securities and Exchange Commission.

Next Tuesday, ADA management and directors will be in New York to ring the bell closing the day's trading at the NASDAQ Stock Market. In addition to being broadcast on National Business Television at 4 p.m. Eastern, the bell-ringing ceremony will be webcast live on NASDAQ's website and on the NASDAQ market site tower in New York City. Operator, we can now open up the call for questions.

(Operator Instructions). Ben Kallo, Robert W. Baird.

Hi, good morning, guys. On the topic of natural gas switching and any kind of legislative risk, could you talk about how those topics come into play when you are monetizing the RC units?

Well, the switching only occurs on some site by site if the utility has other options of existing gas-fired units. The units that we are targeting for our Refined Coal applications are usually big base-loaded coal-fire power plants that are kind of at the heart of their base-loaded operations. So as I said in my opening statement there that we are seeing very high coal utilization rates and gas is still low because these plants are needed to meet that base-loaded demand. So whether it is regulatory, whether it is low gas prices, we don't see much impact of these gas prices on the units that we are installing our Refined Coal units on.

Okay. And now that you have it looks like three monetizers, different monetizers, does that make it easier for you to monetize the remaining systems or do you intend on expanding that number of monetizers?

We expect that at least one of the new monetizers will want to do additional units and that will be easier because now we have our agreement with that monetizer to move forward on. We will probably expand to two or three additional monetizers over time and those are currently in the works.

And then should we read into that, the expansion in the number, also expanding your economics around the projects?

Well, the economics is expanding with the market and what is happening in the tax credit market is that as these units get derisked and that risk comes from -- first, technically it is derisked because we have been operating for over two years on two units. It gets derisked as several other Refined Coal facilities that were started up a year or so ago by various companies are going through audit now. Once they go through their first audit, that derisked that. So as a result, the monetization rates that we are seeing increases the -- is becoming higher, so we are negotiating higher monetization rates. And also as we are getting some of the M-45 systems up and running with the licensing agreement, we get additional economics there. So yes, each of these newer units as we move forward should be better than the previous unit.

Great, thanks, guys.

(Operator Instructions). Graham Mattison, Lazard Capital Markets.

Hi, good morning, guys.

Good morning.

Just a question on the eighth unit that you monetized yesterday -- I'm sorry -- the other unit that you monetized yesterday. Did that require a private letter ruling?

No. None of these require, absolutely require it. In some cases, the monetizer wants to have that for his protection because the monetizer is taking on all the risk. So if there is a nuance in the operation that they feel is different or other things have been gone through some scrutiny, they will want a private letter ruling. So that is purely up to the monetizer.

All right, so right now, you are waiting on two other private letter rulings right now, is that correct?

We have a couple private letter rulings. The key one is on an eighth unit that we have a permit, we have the monetization docs complete and as soon as we get that PLR, we will then be able to present that case to the PUC and get approval to move forward and then that will be ready to start up operation.

And then any indication or thoughts in terms of when you might hear on the private letter ruling? And then I guess to follow on with that, given your experience or other private letter rulings surrounding these tax credits, is there any reason to be concerned about these?

No. And in fact, there has been -- other companies have -- you have seen PLRs published. They don't put the names in them, but the language in there is very similar to things that we are asking for. As we go through the PLR, this is an interactive process with the IRS. So we are seeing what they are allowing and not allowing and just talking about the language in it. So we don't see a concern around it. It is just a matter of the timing on getting these issued and we are dealing with people with -- working in Washington with finite weekly schedules and vacations and working around that. So we don't believe that there is any issue that would prevent us getting the PLRs that we need.

And then a sense of when you might hear on these next ones?

Well, as I said, we think on this key one that we will be able to get the PLR and get the PUC approval before the end of the quarter.

And then one last question on modeling. Can you just give us a sense of -- with the Refined Coal units, I know that coal plants will be taking downtime throughout the year just in keeping up with the pattern of demand. When should we think about modeling down for the shutdowns in the shoulder seasons?

Well, you kind of have to go back to the FERC database, but usually it is totally driven by the weather and so it is a matter that you will start to see a cooling off in September. But if we have a hot September, that could be high demand. If so, the first shoulder season kind of splits the third and fourth quarter and that always seems to be maybe the third-best quarter and the lowest quarter is usually the spring. But again, if you have a very cold winter, extended winter, that can change that. But usually that first quarter of the year is the lowest one; second lowest being the fourth quarter. Well, actually it is the second quarter that is kind of low because that shoulder season in the spring, that is usually the lower period.

All right, great. That is very helpful. I will jump back in queue. Thank you.

(Operator Instructions). Steve Santos, RBC Capital Markets.

Good morning, fellows. Just a real quick question on this BCSI acquisition. Could you, Mike, go over the economics of this acquisition also? It seems to be something of an inexpensive acquisition at $5 million. What kind of revenues are they doing? Is there any debt involved in the acquisition? Can you expand on that at all?

Steve, we can't at this time. What we have is a signed agreement and right now, we are under a nondisclosure time period until we close on the final purchase, which we expect to be within the next month or so. So once that is open, we will be able to talk about the backlog that they have and other economics around that. So other than what you have seen released while we are in this nondisclosure period, we can't provide any additional financial information.

But Steve, I can add that in response to your question, as we noted in the press release announcing this, that we had purchased for cash. We won't be assuming any debt. We are purchasing the assets. Assuming the closing takes place, which we fully expect, there will be a $2 million payment upfront and then some additional payments that stretch over a period of time that add up to that $5 million level.

Okay. And you anticipate that this will obviously help in the DSI equipment sales going forward?

Yes, we feel that one of the keys for a -- to be able to compete in this market is utilities like to see your installation list and so that is our -- our installation list is where you have got systems up and running successfully. That installation list on ACI, we have got 55 systems out there, so that really helps us sell ACI systems. We have no -- we are building our first DSI system and so it was difficult to compete with that installation list. With BCSI now, we will have an installation list that probably is as the market leader. So we see, with BCSI, it puts us in a comparable position of where we are with the ACI systems.

Great. So it gives you credibility as you approach these targets --

Absolutely.

-- and the DSI systems?

Yes.

Excellent. Okay, thanks, fellows.

[Joe Scott], Private Investor.

Hi, fellows.

Good morning.

The question -- I have a two-part question. The first part of which is that the press release mentions a $100 million revenue and $50 million revenue coming up this year and next year. Am I to assume that the profits could be $50 million by the end of the year for ADA?

Well, let me walk you through that. What we are talking about, as these units come up and operating, we are talking about how they ramp up to a certain level and once they get up to that certain level, they will have a fair amount of consistency of what they will be operating at over the next eight years. And so the guidance that we are providing is that by the end of 2012, we will achieve a run rate of enough Refined Coal facilities operating and leased that it will be generating over $100 million in revenue and $50 million in segment income.

But that doesn't affect profits? It affects profits --

Well --.

-- but you're not (inaudible) profits.

That $50 million of segment income is what flows out after all expenses, after payments to all of our minority partners and then what remains is the taxes on it, which will be at a low rate. So the total profits of the Company will be the summation or the aggregate effect of the different segment incomes. So we will add the income or profits from the margins from the Refined Coal with the margin from the other reporting segments of the business.

Understood. So that is why you can't make any kind of a prediction now what is going to happen by the end of the year.

Well, by the end of the year -- what impacts that is we don't know when they will come up, this month or next month or whatever month, so we can't say what the income will be for this segment through the end of the year. We can tell you what it will be -- the guidance we are giving is what it will be by the end of the year, so that will determine -- the end-of-the-year run rate will determine what 2013 looks like.

Okay. One final question. Many coal companies are either at the verge of bankruptcy or already in bankruptcy like Patriot Coal and Arch Coal. Patriot coal is down to $0.10 a share and Arch Coal and Peabody and [Council Coal], Teck Resources, these companies, among other companies, have lost 50% to 80% of their share value. What is ADA's future with these coal companies that are doing so poorly? Where do we stand with these coal companies not doing well?

Well, you have to -- the coal companies were hit hard this winter with the combination of a very warm winter and low gas prices. And so you saw decline in their market cap, which is the market's estimation of how well that stock should trade. But it may or may not have anything to do with the viability as a company. They still have the assets of the coal, they still have the demand out there generating.

The Patriot Coal, that was based on a -- their coal mines were these more expensive underground mines in the East producing higher sulfur coals and that is as the coal pricing went down and it cost so much to get that coal out of the ground, they were no longer viable. But you look at most of our business is based on the Western coals. The Western coals are very cheap to get out of the ground and therefore, they have much more flexibility to adjust their pricing based on the other energy options. But the price of that coal does not impact ADA's profitability.

So the fact that their share price is so much lower doesn't have anything to do with ADA doing business with them and affecting their own profits?

We do business with the utilities who buy coal from the coal companies and they buy our technologies from us and so the fact that they are getting the coal from the coal companies cheaper hurts the coal companies, but it doesn't impact us.

Okay. Thank you.

Kevin McKenna, Stifel Nicolaus.

Hello. A couple of questions back to the Eastern coal versus Western coal. First of all, how do the regulations impact both the Eastern and Western coal?

Well, the regulations are generic, so it is the same regulation on both, but you think about the two parts of the new MATS regulation that we provide. One is for mercury control and the other is for acid gases. Well, one of the big characteristic differences between the Eastern and Western coals, besides the Western coals are cheaper to mine, is that the Eastern coals have higher sulfur and that higher sulfur has to be cleaned up. And that produces also more acid gases.

So the companies that are most at risk and facing retirements because they are also older are these units operating in the East that have been burning the Eastern coal, so higher sulfur, so they are going to need to clean up the acid gases. With the regulation on SO2, they may have to add scrubbers, so those are the ones at risk, where the Western coals, which is most of our market have the advantage of being cheaper and therefore have more ability to adapt to changing energy prices and they are also very, very low in sulfur. And also on the mercury side, their mercury is easier to capture with our technology. So with the regulations and with the lower coal pricing, it is the Eastern coals that are more in jeopardy.

Okay. And second question, looking through the DOE database, I came up with a number somewhere around 25% that lignite could expand the CyClean market. Is that pretty close?

Well, I don't know about percent. It has opened it up to four or five pretty significantly sized units. So when we originally came out with the CyClean plan, we had a list of PRB cyclone boilers and by the time you got down to the 20th unit or so, you were down to maybe something burning maybe 0.5 million tons a year. Whereby opening it up to the lignites and showing it is viable on the lignite cyclone units, it pushes several of those. It could have been 500,000 tons a year or up to 3 million tons a year and since all the economics are based on tonnage, that is a pretty significant step for us.

Okay. And last question, when you self-monetize, there is a cost associated with that. I am using $1.50 to $2 a ton, somewhere in there and rather than monetizing the tax credits, you take them yourself, so you don't receive any income for that, is that correct?

Yes, and you are seeing that a little bit in this quarter in that, in operating these units, it is actually a little bit higher because if you remember the chart we have in our presentation on what happens when we operate, it costs about $2 a ton for us to pay for the chemicals and pay for the labor. Also, we have to pay the utility that $1 a ton that we are having to pay ourselves. So those end up reducing the operating income. And so it gets hit in the quarter in which they are used, but you see that we generated $7.5 million from CCS in tax credits. That will benefit us as we become profitable from these new units that that will be able to offset future taxes.

So this is a case where we have made decisions and we think they were good decisions that hurt the second quarter because of additional expenses, but create the asset of a tax credit that we will be able to offset future tax burdens on.

I guess just one follow-up to that, then I will be done. So when you monetize yourself versus going through a third-party monetizer, how much does that increase your cash flow?

Well, again, it is the difference between -- I'll have Mark correct me if I'm wrong -- it is about three -- from the joint venture side, it is a difference between paying out $3 a ton in expenses versus getting $3 to $4 a ton in rental revenue.

Right. And then you still -- you still keep all of the tax credits and things. So on a net margin basis, by the time you apply that back against your taxes, how much better is your --?

Well, remember, the whole deal is you are paying $3 a ton for expenses, but you are getting over $6 a ton of tax credits.

Yes. Okay. Thank you.

Jim Gentrup, Discovery Investment Research.

Good morning, gentlemen. Just wanted to follow up with that tax issue again. So I am to understand in that $7.5 million of tax credit that was generated this quarter really didn't get put to use yet? Do I understand that correctly?

That is correct. So it is there for future use. Just like other credits, you can offset them against current tax liability if you have that. If not, they carry forward for 20 years, so they have a long life to them.

Okay. I guess the part I don't quite understand yet is that you did have pretax income, so maybe if you could just clarify that for me.

Yes. As I attempted to explain in the script and this has to do with how, for accounting purposes, you record taxes for the year, the requirement is that you look at what you expect your effective tax rate for the entire year to be. As I noted there that we actually expect instead of having a rate of -- and we've talked about this long-term rate of 10% or you often think of federal taxes as 30%, 35% and state taxes on top of that of -- I will give you a 35% to 40% rate. We are actually expecting because of the tax credits this year a negative rate. So we are expecting for the entire year to have a rate that yields us actually a benefit for the year where we would go -- with expected income for the year, we would show expected addition to that income from our taxes from this benefit.

That negative rate, when you apply it to the cumulative loss for the affected quarters, not just for the second quarter, but our year-to-date results for the second quarter, gives us a tax expense for the second quarter, which is again not what you would logically expect with the credit, but this is a requirement of when you look at a tax rate for the entire year.

Okay. I get it. All right. And then moving on to the EC segment, can you give me the breakdown again please between systems and equipment and consulting really quick?

You will see that in the Q when it comes out as we give a little breakdown there, but we had increases. There was -- in the EC segment, had income for the quarter of about $4 million, up from a little over $1 million last year and that's increases both in equipment and consulting services there. But the details of that will be in the Q and that will come out in a day or so.

And can you guys -- do you guys have -- I mean I know you mentioned $94 million in bids. We have got two quarters left. I just wondered if you had some visibility into how when these things would start breaking loose a little bit. I mean -- it sounds like -- it is a big number, but yet for modeling purposes, do you think that you will have a big jump here in Q3? Do you have that kind of visibility into this or no?

Well, we have got no say in when these are awarded. We know the equipment has to be up and running by April of 2015 and so the guidance we are giving there is that we think we will get $300 million in revenue in that time. So will you see significant increase in revenue in the third quarter? Probably not. We hope that we will be able to see contracts awarded, but when we -- the revenue is produced on an ongoing basis and so we might announce a big contract in the third quarter and not see a lot of that revenue. And that will only be recognized as it is generated over the next year to two years for that contract.

Okay, fair enough. And then the recognition of the revenue for the CO2 capture plant, is that beginning in Q3 because of the construction beginning or is that a -- how is that recognized?

That is exactly right. So those are, much like a time and materials-type of contract, is that we are able to build through the actual costs that we incur and so as these construction activities on the pilot plant ramp up in the third and fourth quarters, as you noted, we are expecting for the balance of the year to recognize around $5 million on that contract. Much of that will be work that others do that flows to us, but our manpower and engineering work is a part of that as well.

Okay. And the last question is on that. Mark, that $469,000 charge that you take below the line for the settlement, that was a pretty good jump sequentially from Q1. And I just wanted to get a little better picture of how to model for that going forward.

Yes, and as we have talked about that going forward, we would expect this is the royalty amount that we took the obligation on as part of the settlement on the indemnity in the Norit arbitration. We expect that amount to amount to $1 million to $2 million a year going from here through 2015 and then ramping up as we think active carbon use will ramp up, which in response to the MATS (inaudible) plants need to be in compliance.

So the way that that works for us though is that it is based upon actual cash receipts that are made and we know that the difference between the first and second quarter for us is that they -- although the sales were somewhat higher in the first quarter we understand because they hadn't -- they were sitting in accounts receivable (inaudible) received as those -- some of that hit in the second quarter. So we still think we are looking at that between $1 million and $2 million a year for the next several years and this amount that we received in the second quarter fits right into that.

Okay, guys. Thank you very much.

I think we have time for one more question.

Doug Thomas, JET Investment Research.

Hi, guys, good morning.

Good morning, Doug.

Most of my questions have been answered. I was wondering if you -- in light of some of Jim's questions and the caller before that, I started to ask you in Baltimore to try to frame the Company. You have always been very long-term focused. Obviously had a lot of near-term issues affect your overall plan for the Company. You all own a lot of stock and obviously are very heavily incentivized as we shareholders are in terms of alignments and so forth in terms of how the Company performs.

And Mike, I guess I just had a question. Maybe you could sort of frame the view of the Company a little longer term even beyond '15. What is it that you are really trying to build and accomplish here just to kind of put an exclamation point on the call today? The BCS acquisition, for example, I mean should we read into that where you are headed in terms of additional acquisitions or where you are intending to grow the Company and so forth.

I think sometimes people get too caught up in this quarter-to-quarter growth issue and the fact is that these environmental issues that you guys are facing and helping utilities because you're going to be around for quite some time and I thought maybe you might want to offer a little bit longer-term perspective.

Well, it would be easier if I can talk with my hands and you could see me and show you a chart, but the way we look at it, Doug, is this Refined Coal is our biggest opportunity right now for cash generation. But it is going to grow up to a point through the end of next year where it is going to become at a plateau and that plateau is going to be pretty significant. We think it could be upwards of $200 million -- over $200 million in revenue and $100 million of segment income at that point. But it is going to be then fairly flat until 2021.

Then you put on top of that an equipment market that we think will be $300 million over a three-year period. And then you have got some growth that we think we will see from the enhanced coal in which it is going to be ramping up probably next year through 2015 and then it will be flat. So if we are looking beyond 2015 and we want to show a continuous growth, we are going to have to come up with some new things that we can add on top of the Refined Coal segment and on top of the enhanced coal segment and to replace the equipment segment.

So in addition to executing on what we are doing now, we are also looking at new technologies that we can bring to market and be ready in the 2016 timeframe. And so yes, the BCSI kind of looks at that. I think the primary driver for BCSI is that it really makes us more solid in that DSI market. But at the same time, we have -- so that gives us a big overlap with what we are doing with ACI and is very complementary, but they are also doing some work on the water side. So that gives us an avenue to potentially expand beyond just powerplant.

CO2 is something that if you look at -- we are going to have to be replacing significant revenues and earnings of Clean Coal of the Refined Coal in the 2021 timeframe. Well that is getting into the kind of timeframe where we might be starting to see some commercial activities around CO2.

So we do have a very long-term view of the Company. Working in the coal industry, we look at coal and see that as a viable part of our energy mix over the next three or four decades or more and so we want to be there playing a key role in providing the technologies we need to continue to grow the Company beyond what we are seeing over these next couple of years.

I appreciate it. I also just want to say I do appreciate you guys taking, as much as some people might view it as a near-term hit to earnings, I mean I appreciate you guys taking a longer-term view with respect to taxes. So good quarter and good luck next week.

Okay, thank you, Doug. And I think that does summarize our approach is to not look at this as a quarter-by-quarter basis and make a decision that yes may show an additional expense in this quarter with the benefit again an expense of $3 a ton in coal to get a tax cash benefit of $6 is a good decision for the Company even though it doesn't pay out in this quarter.

So in summary, I would like to thank everybody for joining us today and your continued interest and investment in ADA.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.