Arq Inc (ARQ) 2013 Q2 法說會逐字稿

Greetings, and welcome to the Advanced Emissions Solutions Second-Quarter 2013 financial results.

At this time, all participants are in a listen-only mode. A 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, Graham Mattison, Vice President of Investor Relations. Thank you, Mr. Mattison. You may begin.

Good afternoon, everybody. First, I'd like to remind you 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 Exchange Act of 1933, which provide a Safe Harbor for statements in certain circumstances identified by words as believe, will, hope, expect, anticipate, intend, and plan, the negative expressions of these words or similar reasons.

Actual results could materially differ from those discussed in the forward-looking statements as a result of various factors, including factors discussed in our filings with the Securities and Exchange Commission, with particular emphasis on the section titled Risk Factors in our Form 10-K.

Listeners are cautioned not to place undue reliance on forward-looking statements, and to carefully examine information that Advanced Emissions Solutions discloses publicly in its filings with the Securities and Exchange Commission, or otherwise, before deciding to invest in Advanced Emissions securities.

The forward-looking statements made during this conference call are presented as of today's date, and disclaims any duty to update them unless otherwise required by law to do so.

Recording of this call can be found in the Investor Resources of our section at www.advancedemissonssolutions.com.

So thank you very much, everyone, for joining us for the second-quarter conference today. After the market closed, we issued our earnings release and slides related to our prepared comments. A copy of the press release and the slides are available on the Investor Relations section of our website at www.advancedemissonssolutions.

Joining us from the Company today are Dr. Michael Durham, President and CEO, who will provide an update on recent corporate developments and our future plans; and Mark McKinnies, Senior Vice President and CFO, who will discuss our 1Q-- our second-quarter performance and financial results. We will then open up the call for any questions, and the Operator will explain the process for asking questions at that time.

Before I turn the call over today, I need to inform our audience that our discussion will include information involving non-GAAP financial measures, all of which are reconciled with GAAP numbers in the exhibit accompanying our press release on the investor section of our website. In addition, some of our comments today will include forward-looking statements. Please keep in mind that our actual results could differ materially from those projected in any of our forward-looking statements.

With that, I will turn it over to you, Mike.

Thank you, Graham. I will be referring to the slide presentation posted on our website this afternoon while discussing our business, starting with our commercial Emissions Control business as seen on slide 4.

The Mercury and Air Toxics Standard, or MATS, was made final in April of 2012, which requires over 1,200 existing and new coal-fired electric generating plants to reduce emissions of mercury and other hazardous air pollutants. Some plants will have to be in compliance by April of 2015, while others have been given a 1-year extension and will have to meet the standard beginning in 2000-- (technical difficulty).

The chart in the upper left-hand corner of slide 4 shows that the market for equipment to meet the federal MATS rule is well underway and evolving as expected.

We have seen continued procurement activities for activated carbon injection, or DSI-- or ACI, and DSI systems. We have taken a number of steps to prepare for this market, including our 2012 acquisition of the assets of Bulk Conveyor Systems, as well as expanding our engineering capabilities and putting arrangements in place with various suppliers and component manufacturers.

Since the MATS market commenced in late 2011, our companies have won or received letters of intent to award contracts currently valued at approximately $80 million for ACI and DSI systems. And we're in discussing potential projects for ACI and DSI in excess of an additional $150 million.

We're very pleased with our wins to date. We are ready to continue to help our customers meet the challenges of the MATS rule, and we're looking forward to winning additional ACI and DSI projects.

The upper right-hand corner of slide 4 highlights the significant increase in backlog on contracts from levels 2011 and 2012 to the backlog of $33.2 million as of June 30, 2013. I would note that there is a one large fleet order for ACI and DSI systems that is in excess of $20 million that we are not including in the backlog until signing the final contract. We were notified that we were awarded this contract in the second quarter, and we're close to finalizing the details, scope, and paperwork, expecting it to be booked in the third quarter of this year.

This chart also shows the revenues are just beginning to increase from these new contracts. We expect that these revenues, which are recognized on a percentage of completion basis, to grow significantly over the next several quarters as these contracts require deliveries of most of the systems in 2014 and 2015, with some likely to slip into 2016.

In addition to ACI systems, ADA also provides options for reducing mercury emissions with coal treatment technologies. For example, Clean Coal Solutions, our joint venture with NexGen Resources and an affiliate of the Goldman Sachs group, markets three different technologies -- CyClean, M-45, and M-45-PC -- all of which can reduce emissions of NOx and mercury, and qualify for IRS Section 45 tax credits.

The tax credits, currently $6.59 per ton of RC, are available through 2021. The JV has qualified 28 facilities to reduce RC and generate tax credits until 2019 for the first two facilities and until 2021 for the newer 26 facilities.

Let me now refer to slide 5, which looks at our 10 RC facilities that we are currently operating. We now have 7 of 10 facilities leased or sold, and we expect these will be generating more than $75 million in gross margins to Clean Coal on an annual run basis through 2021.

However, two of the seven facilities were not leased until late July. Therefore, the financial impact of these two transactions will not show up until the third quarter earnings report. One of these facilities was operated by Clean Coal and generating tax credits since mid-2012.

As noted in the past, when Clean Coal operates a facility to retain a tax credit, it incurs about $3.00 per ton of operating expense to generate approximately $7.50 in tax credits. Our portion of these tax credits are only shown in our footnotes. As a result, our financials for the second quarter reflect no lease payments from this recently leased facility, and only operating expenses which were annualized amounts to about $8 million per year.

In the third quarter, this unit will contribute the net of two months of lease payments, offset by one month of operating expense, and is expected to achieve its full contribution to the ongoing run rate in the fourth quarter and beyond.

A ninth facility was installed, but did not operate during the second quarter as we waited for the public service commission to approve the lease transaction which was received in late July. So this facility contributed no lease revenue or expenses in Q2, but has begun generating revenues for Clean Coal in late July. We expect collectively these two recently leased facilities will generate more than $24 million in annual revenues.

In addition, more than $14 million in upfront lease payments were received by Clean Coal in July as part of these transactions. The impact of this increase in cash is not included in the $12 million of cash shown on our balance sheet at the end of Q2.

A 10th RC facility began operating in early June. Clean Coal is operating this facility for its own account, while the lease and other necessary contracts are being finalized which is expected later this year.

Turning to slide 6, I will update you on the remaining RC facilities. Clean Coal has been making progress on the remaining facilities, working in parallel as we finalize transactions previously discussed.

On the remaining 18 facilities, we have five facilities that we anticipate will be operated -- power plants with cyclone boilers -- that have together historically burned more than 20 million tons of coal per year. We are currently in negotiations to sell or lease four of these facilities that could lead to closings later this year or in early 2014.

The remaining facility is expected to be located at a power plant that is undergoing financial restructuring and is more likely to close later in 2014. This is a large cyclone boiler that we believe makes it worth waiting for as they continue to work through their internal issues.

The other 13 facilities are expected to use our new M-45-PC technology. And it is our goal to get these located at power plants that have historically burned an average of 5 million tons of coal per year. We are in negotiations for four of these facilities, and expect at least one to begin operations later this year.

The transactions for the other nine facilities continue to move forward, and our goal is to finalize them in 2014.

One potential advantage of the M-45-PC technology is that there are several utility groups that own multiple power plants that could use the M-45-PC refined coal technology. This fact could help speed up the closing processes and allow us to meet our target of having all 28 refined coal facilities in permanent operation by the end of 2014.

In addition to significant economic benefits of the RC business producers, it is also creating tremendous opportunity to demonstrate the effectiveness of our improved mercury control technology. We plan to market this technology as a mercury-only product, well beyond the 28 RC systems that will be using it.

Starting in 2015, when the federal mercury standard must be met by most plants, we anticipate that an estimated $1 billion to $2 billion annual market will develop for chemicals needed to capture mercury emissions on a continuous basis. We will compete in this market for our technology, which we have previously called enhanced coal, but now market under the name M-Prove.

Through our RC testing and operations, we have demonstrated the ability of this technology to provide benefits to the consumer in the range of $1 to $4 per ton of coal burned when used on Western coals by eliminating or minimizing the amount of activated carbon to achieve compliance and reducing its negative impacts of fly ash sales. US power plants consume up to 600 million tons of Western coals per year.

One of the advantages of our technology is that it does not use bromine. Power industry is beginning to experience corrosion issues in their plants that they attribute to the addition of bromine used to enhance the capture of mercury. In addition, EPA has announced their intention to regulate the discharge of bromine and effluents from power plants. Thus, we found the industry open to considering a new technology such as M-Prove, which avoids what could be very expensive plant repairs associated with the use of competing products.

We will be providing M-Prove technology through two marketing and distribution channels. We have licensed the technology to Arch Coal for use on its PRB coals at the Arch mines, and marketing the product as PRB Plus. We will also be applying it at individual plants that source coal from multiple providers.

As well, we were recently awarded the first of what we believe will be a family of patents designed to protect our technology both in the US and abroad.

With the marketing M-Prove technology as part of our mercury control solutions, testing and customer feedback has been positive. And the continued successful operation of our RC facilities has given us more data to show customers its benefits.

We're encouraged that some utilities are already purchasing equipment to apply chemical additives to their coal, and we expect demand for our product to ramp up in 2015 when utilities will start using consumables to control their mercury emissions.

In addition to providing emission control technologies for these new regulations, we continue to develop new technology to address future challenges for the coal-fired power generation industry. The EPA has announced that they will release standards for carbon emissions for new plants next month, and will provide draft regulations for existing plants next June.

We are in the construction phase of a $20.5 million program supporting the development of our re-generable solid-sorbent technology to capture carbon dioxide from coal-fired power plants and industrial sources. We are continuing managing the construction of a 1-megawatt Carbon Dioxide Capture Pilot Plant being installed at Southern Company. Southern Company is a co-funder of the project with other participants.

We are also evaluating alternatives, applications for the carbon capture technology that could have a potential market ahead of regulations on the power plants such as enhanced oil recovery.

So in conclusion, we are pleased with the progress being made in the Emissions Control market. And while some of the delays in the refined control-- Refined Coal market have been frustrating, we're encouraged by the recent closings and the progress we're making on additional facilities that we expect to close in 2013 and 2014.

We continue to focus on executing on opportunities that we expect to create significant revenue growth and cash flows for the Company over the next three years. We are also positioning ourselves for continued long-term success, and are developing technologies for future markets.

So now let me pass this over to CFO Mark McKinnies to provide financial details for the second quarter.

Thanks, Mike, and good afternoon, everyone. I'll also be referring to the slide deck that Mike was talking about.

So turning to slide number 8, we highlight our RC segment results, which consists of the consolidation of the financial results of Clean Coal Solutions, LLC, or Clean Coal.

During the second quarter of 2013, we had those nine facilities producing RC. Five of the total were leased or sold to third party RC investors, and four were operated by Clean Coal and retained for its own account.

The four operated by Clean Coal generated tax credits for ADA of approximately $3.3 million during the quarter, which we expect to offset future tax expense. As we have mentioned before, when Clean Coal operates an RC facility for its own use, it records the purchase and sale of coal at approximately $20 to $40 per ton, incurs operating expenses of approximately $3 per ton of coal treated, and generates approximately $7.50 per ton in total tax benefits. Because we provide a valuation allowance for all of our deferred tax assets, our share of those tax benefits are not shown in the financial statements.

When an RC facility is leased or sold to an investor, Clean Coal recognizes revenue and receives ongoing payments from the RC investor, but from that point forward does not incur the coal purchase cost or the related operating costs.

Total RC revenues were $44.2 million during the second quarter of 2013, and included revenues of $11.6 million from facilities leased or sold and $32 million in revenue from resale of coal produced by those RC facilities operated by Clean Coal.

During the quarter, gross profit for the RC segment was $8 million or 18% of the RC revenues, compared to $6.4 million or 13% during the second quarter of 2012. Gross profit adjusted to exclude coal sales, raw coal purchases, and retained tonnage operating expense was $12.4 million for the second quarter of 2013 versus $10.9 million for the second quarter of 2012; both amounts representing about 99% of the adjusted RC revenues for the applicable period.

Please note the non-GAAP measure reconciliation comments on this slide and in the appendix to the slide deck.

Looking at the operating statistics shown in the lower section of slide 8 for the second quarter of 2013, the nine operating RC facilities produced a total of 3.8 million tons of RC. 2.6 million of these tons were produced at facilities leased or sold to third party investors, and 1.2 million tons were produced at RC facilities retained by Clean Coal for its own account, generating those tax credits for Clean Coal's owners.

This compares to a total of 3.8 million tons treated in the second quarter of 2012, and 5.1 million tons treated in the first quarter of 2013. The decline in tonnage produced from the first quarter of this year reflects a seasonally weaker energy demand period in the second quarter, and also routine maintenance down times taken by the host utilities where our RC facilities operate.

We expect to see higher RC production in the third quarter this year, given the strong electricity demand this summer, as well as the addition of our newest RC facility that was leased and began operating in late July, and a full quarter of production from the RC facility that commenced operations in early June.

Turning to slide 9, we highlight our Emission Control, or EC, segment activities which provide equipment, chemicals, and services to help our customers meet existing and upcoming emission regulations.

EC revenues in the second quarter were $12 million, which were up over 200% from the same period in 2012, due primarily to increased equipment revenues as we make progress on the contracts awarded in response to the MATS rule.

EC segment gross margin of 19% was lower than the 22% from the year-ago period, primarily reflecting a different product mix in the quarter. Given our percentage of completion, revenue recognition accounting, and an evolving mix of jobs won and products produced, results in this segment may be somewhat lumpy when comparing quarterly periods. However, we continue to expect the medium-term gross margin for this segment to be about 20%.

As of June 30, 2013, we had contracts in progress for work related to our EC segment totaling approximately $33.2 million, up from the $32.7 million as of March 31, 2013. As Mike mentioned, there is a large contract that we expect to book in the backlog during the third quarter, not included in those numbers.

Turning to slide number 10, we highlighted our CO2 capture segment that represents DOE and industry-supported development and demonstration contracts. Revenues during the second quarter of 2013 increased significantly to $2.7 million, due to moving into the construction phase of the project.

We had DOE contracts, including anticipated industry cost share, in progress totaling approximately $8.5 million as of June 30, 2013. We expect to recognize a total of approximately $5.5 million of these contracts in the remainder of 2013 and the balance next year.

Turning to slide 11, we provide a summary of our consolidated financial performance in 2013. I would like to provide additional color in some areas.

Consolidated revenues and cost of goods sold in all the periods seen on this slide include the purchase and sale of coal for the retained RC facilities, which is a zero margin pass-through. Excluding coal sale revenues, our consolidated revenues were up 84% from the same quarter last year, and up 16% from the first quarter of this year.

As the general and administrative expenses, which totaled $8.1 million in the quarter, compared to $4 million in the same quarter in 2012 and $7.3 million in the first quarter of 2013, the increase from the first quarter of this year primarily reflects inclusion of the non-cash cost for the executive long-term incentive plan awards put in place and other compensation amounts recognized during the quarter.

The increase from the prior year is also due to amounts incurred by BCSI, which acquired the assets of Bulk Conveyor Specialist, Inc. August of last year; higher amounts from Clean Coal; and overall increases in overhead due to increases in our staff and expansion of our corporate facilities.

Also, I'd like to point out that our income statement reflects the operating costs incurred by Clean Coal when it operates an RC facility for its own use and retains the tax credits.

Year to date, our share of tax credits earned was more than $8.6 million. As noted before, the tax benefit from these credits is not recognized in our present financials as we record a valuation allowance for all our deferred tax assets.

Below the operating income line, we report the following for the second quarter. Income of $274,000 from our equity interest in the net income of Clean Coal Solutions Services, LLC, which is our 50% owned joint venture that oversees the routine operations at the RC facilities; an expense of $676,000 included in other expense related to ongoing royalties due as part of the settlement of the Norit arbitration in 2011.

As shown below, the income to tax line is-- also shown below the income tax line is a subtraction of $3.2 million for income attributable to the non-controlling interests of Clean Coal for the quarter.

For the second quarter of 2013, our net loss was $3.2 million or $0.32 per basic and diluted share, as compared to a net loss of $1.3 million or $0.13 per share for 2012.

Cash flow used in operations for the quarter was $5.2 million as compared to a use of $4.4 million in the same period in 2012.

Our consolidated cash position as of June 30 was $12.3 million, which does not include approximately $3 million we hold in certificates of deposit to support Letters of Credit, and more than $14 million in cash that we received by Clean Coal in late July as upfront payments for the new RC leases.

The decline in our cash balance from the end of March grew to an approximate $3 million cash payment made as part of our settlement with Norit, and approximately $2.9 million in cash distributions made by our joint venture partners.

Our liquidity position remains solid and has been bolstered by the upfront lease payments received as part of the recent RC leases. In addition, we are in discussions to secure a line of credit used to support working capital, and our letter of credit needs for our rapidly-growing Emission Control equipment business.

Although our working capital deficit was $18 million, such amount includes as liabilities, deposits, and current deferred revenues that totaled $30.6 million, has been steadily improving. Both the deposits and the current deferred revenues represent cash receipt that we generally expect to recognize as revenue in future periods. However, such amounts negatively impact our overall working capital as they are reported as current liabilities.

Long-term liabilities totaled $14.3 million, which amount also includes $11.2 million of deferred revenues. And stockholders' deficit totaled approximately $42.3 million at quarter end.

With that, Operator, would you please open the call for questions.

(Operator Instructions). Our first question comes from the line of Colin Rusch from Northland Capital Markets. Please proceed with your question.

Thanks so much, and congratulations, guys, on all the progress. Can you just give us a little bit of guidance on how we should think about refined coal revenue for the third quarter? Just given typical seasonal strength with the relatively cold weather so far, how would you kind of direct us there?

I think the easiest thing to do there is look at the production during the second quarter, and then look at the change. So as I mentioned that we started up, we monetized-- we got two units up and running at the end of July. So we'll have two months of lease payments from these 2two facilities that will add to the existing. We'll have one month of expense included in that, so you can make that modification. I think you see some of these numbers if you look on slide number 5 that are there.

The other part of the question is about the seasonality. You're right that we do see lower coal usage in the spring, but some of that is going to be modified because of the nature of the transactions in which there are significant fixed components of the lease payments that are not proportional to actual coal usage. So you're going to see less and less seasonality in these restructured agreements than you would have in the past year.

Okay, perfect. And then, how many financial parties are you discussing with at present? And how many of those parties are new in the last quarter in terms of some of these agreements that you're looking at closing in the next year or so?

So we have three that have leased the first seven. And we are in discussions with three or four that are progressing along, and maybe another four or five that are further out.

Perfect. Thanks a lot. Appreciate it.

Our next question comes from the line of Rob Brown from Lake Street Capital Markets. Please proceed with your question.

Good afternoon. On your M-45 facility that you're in negotiations on in kind of-- well, you have four negotiating, but the one you're expecting, could you give us a sense of kind of where that is and how that could develop over the rest of the year?

Well, there's actually four that we're in negotiations on, and what we said was we think at least one of them will close before the end of the year. And so on all 4four of those, we are in the process of exchanging documents and contracts and moving forward.

So we find it's kind of well down the line once we get to a point that our customer is engaging the outside legal and spending money to look at and review the contracts.

Okay, great. And is this with a new monetizer or an existing monetizer?

We-- it's both. So actually, the negotiations that we have on these is we first have to negotiate with the utility. And so we're working with the utility for four specific plants. In parallel, we may be having discussions with a monetizer of which we would have in mind a monetizer for each specific plant.

Okay, great. And then on your M-Prove technology you said sort of 2015 before that turns into revenue, but could you give us a sense on how that could develop in the next 12 months? Will you start to see pilot projects and initial contracts, or is that something that you really don't see much until MATS deadline hits?

So, let me tell you what's happening in the market. So right now, utilities are doing tests to figure out what they need to buy and to prepare for that 2015 market. And so we're doing a number of tests with our technology, as well as we're demonstrating it on all of our programs that use refined coal.

In addition, they're buying the hardware for controlling mercury, and so most of that activity is around the activated carbon systems that we're selling. And there are also we're seeing some utilities that are including in that bids for coal chemical injection systems that are capable of injecting a number of different alternative coal additives.

After that equipment is in, which will be about a year from now or so, they will then look to operate those initially from our test basis to get prepared for that role. So what you're seeing is they're going through the process, they're doing the testing, they're buying the hardware, but little or no negotiation on consumables.

For example, we're seeing this very large market in buying the activated carbon injection systems, but if you listen to the earnings calls from the companies that sell activated carbon, they're reporting very slow sales, and discussions around sales, because they expect that the utilities won't be in a position to discuss even buying activated carbon for a year or so.

So we're in the same position that they're probably not going to be looking at buying any form of the consumables until a year or so that the equipment they purchased has been installed.

Okay, great. Thank you.

Our next question comes from the line of Sanjay Shrestha from Lazard Capital Markets. Please proceed with your question.

Great, thank you. Good afternoon, guys. Couple of questions. First, when you sort of talk about this M-45, and four facilities in negotiation, expect one to be operating in the second half '13, so that's basically operating using the technology. Does that also mean you actually get the financial buyer and it is equal to being monetized as well, or is this being operating to sort of use the technology? How am I supposed to be thinking about that?

Well those are two different questions, and they could either be-- our hope would be that they're both yes.

Okay.

But at the very least, we want to get it up operating. Because if we get to a point that we got the utility saying yes to the operation, we feel we need to get that up and operating. Because once we start operating at a plant, there's a good chance that that facility will be operating for the next eight years.

If the utility gives us the go-ahead and we're not in a position to start that facility up, we really take a chance that it won't get up. And just in over the last year, we've seen delays occur because a plant gets sold, a new plant manager come in, a death of a key person in the negotiation.

So we're going to-- if we get the opportunity, we're going to get it up and running and even self-monetized, and we're looking at ways of minimizing how long that's going to happen.

But in some cases, we are talking with the monetizer about a particular plant, but that negotiation-- the negotiation with the utility has to come to a point that we've got pretty much a deal that's pretty firm and locked up that we can then take the monetizer. Because the monetizer doesn't want to put in the effort to start having outside legal review and tell its-- he knows there's a deal on the table.

Got it. And that certainly is the right thing to do to get this M-45 going as well anyway, right.

And can you again, once again guys, remind us sort of, because this is a technology where you also get the licensing fee. So what would be-- not only that, you've got a much more tonnage from this last 13 units, but you also get even better economic value proposition for you guys. Can you just remind us that again one more time as to how am I thinking about sort of the total cash coming from this remainder of the 13 units and the licensing fee and things like that?

Well, so this kind of goes back to the second technology, the original M-45. So we've licensed that. And kind of the guidance we've given on that, Sanjay, is on the CyClean, we own 42% of the joint venture. So we get 42% of the economics.

On the M-45 systems, we get a royalty that's off the top, and then we get 42% of the rest. And so the best way to look at that is to think that we get about 50% of the economics of that instead of 42%.

That being said, we're still going through the process of defining the exact chemical formula and modifying that. Getting cost as we're looking at going permanent operation on these, so we'll get long-term contracts for the chemicals instead of short-term. But we think there's going to be a little higher chemical cost associated.

So the biggest advantage on the M-45 is going to be more in the terms of the size of the plants than it is in the improved economics.

Got it. Okay, great. One final comment-- actually two, guys. So when I look at the M-45, and let's say you do move forward operating this again, the right thing to do to get this thing started, and even if it doesn't get monetized, how do you feel about sort of the working capital requirement, given that more cash will be-- your pro forma cash is obviously significantly higher than what was reported at the end of the quarter. So do you guys feel comfortable about even having to sort of basically be self-operated and not uncomfortable with the sort of potential working capital uses related to that and things like that, right?

Well, I think where we are is we need to be flexible because an awful lot could happen. We could be very successful. And we talked about moving forward on four cyclones that could happen this year, and do everything we can, and possibly up to four PCs. And so that could be a lot of potential operating expense. But at the same time, we close one or two or three or four of those, they come in with upfront grants and they start paying out.

So it's hard-- that just creates a number of options. It's hard to say that this is going to be what our cash situation is going to look like for the rest of the year. We just need to stay flexible, be in a position that we can make the right decisions for each one of these opportunities.

Understood. Fair enough. Final question then, guys. So looking out to '16 where you'll have a significant amount of cash coming in from all this refined coal then, we would also be getting into the M-Prove technology to offset the MATS equipment opportunity, right.

So the margin profile of that, that's really more like licensing/royalty type business, right? So whatever that topline is sort of kind of flows almost to the bottom line, and that's actually a meaningful impact to earnings as well, right? That's the right way to think about that business?

Yes. At that point, that's going to be a very comfortable situation and some pretty good cash flows. And so it's a matter of what do we do with that, and right now, just about everything's on the table.

We're looking at opportunistically potential acquisitions. We're developing technologies that we might have to grow the business in that 2015/'16 timeframe. So kind of wide open there.

It's a good position to be in. Good stuff, guys. Thank you.

Our next question comes from the line of Kevin McKenna from Stifel Nicolaus. Please proceed with your question.

Hello. Congratulations on getting those last couple machines in.

Looking at the presentation, my question is when I look at page 5, I see that the run rate per quarter for the total partnership goes up to $83 million for the machines in place, which is roughly 22 million tons on page 6, plus the 5 million tons that you're monetizing now. I look at 21 million tons additional for CyClean and 63 million tons for the M-45-PC. That puts us well over 100 million tons. Is that what you think the market is right now?

Well, those are what you add up when we look at our expectations on where these are going to go.

And that's for people that you're already talking and in negotiations with to some level, correct?

Yes. So there's-- on some of these, we have pretty firm ideas on what they are. There's some uncertainty on, say, the last eight or nine, but certainly a lot of opportunity out there around that.

All right. And my other question is on the equipment side of the business, with the fabricating, what percentage win rate have you been running at this point?

Well, our goal has been to maintain that 35% win rate, and I think we're above that.

Very good. Thank you.

Our next question comes from the line of Greg Eisen from Singular Research. Please proceed with your question.

Thank you. Good afternoon. Following on with a question about the total capacity that the prior caller asked. Do you still stand by the expectation that when you're done leasing up all the RC facilities that you would still retain approximately 20% of the volume capacity for self-monetizations that you could take down the credits yourself?

That's the optimum schedule. If we're keeping one in five tons, then it maximizes the after-tax cash available. So right now, we are obviously well ahead of that ratio. So we would try to monetize as many as possible, and then probably try to recover that towards the last few to get back to that five-- four to one ratio.

Got it. That makes sense. Moving on. Going to slide number 5 in your slide deck, facility number nine was leased in late July. You show that it wasn't operating in Q1 or Q2. Was it operating in July at all, and therefore incurring expenses? And if so, could you give us some guidance as to how material that might have been during the month of July?

No, this is the unit that we couldn't start operating until we got the PSC approval. And the approval was effective the 27th or 28th of July, and so we started up at midnight on that day. So it wasn't operated, so it had no expenses. And so you'll see in the third quarter that we'll have about two months of operation fully leased.

Okay. So no self-monetization expenses on number nine. Number eight was self-monetizing. When I look at the decline in the expenses from Q1 to Q2, from minus $2 million to minus $1.4 million, is that simply result of the lower capacity utilization that you discussed earlier, about just being a shoulder season?

Yes. So that one was-- had the variable use, and so that carries us the spring rate. So the number under the annual run rate, don't expect that in the third quarter, remember, because that's going to be probably not at that annual run rate until the beginning-- until the fourth quarter. Because what you'll see from that unit is one month of an expense, two months of leasing, so kind of a net of one month of, in the green.

And actually, Greg, it's Graham. Just to add one thing to that. Remember, it's-- in terms of the utilization, our utilization of refined coal units are about 99%, almost 100%. But it's a matter of when the host power plant goes down or is burning fewer tons in a period, we can only burn-- we can only treat as much as they produce. So-- the host plant; not us.

I get that. And that actually leads to my next question which was there were two issues in the quarter. One was the seasonality due to weather, which it sounds like you're trying to smooth that out of your contracts going forward. Am I correct in understanding what you said earlier?

Well, it's not our attempt to smooth it out. It's just the nature. If you remember the issues that arose as the IRS was looking at the structure of tax credit-based transactions, one of the-- what they were trying to do in those transactions was to show that the producer was at risk. And one of the ways at being at risk is to have large fixed components that's independent of how much you produce.

And so the current monetizer that we had requested that we restructure our contracts, which had a variable and a fixed, to it's primarily fixed at this point. So you're going to see a lot of flatness from here on, less seasonality.

Okay. I get that. And you said that monetizer, but should I-- should we expect that would be for really all your monetizers, given-- going forward given this is the IRS we're all dealing with?

Yes, it's the IRS. So another way of showing risk is to put a lot more money upfront. So you'll see some variability there because some monetizers, you notice that for example in the unit we closed in February paid out a very large sum upfront. So that was their way of handling the risk.

So as we move forward, it's going to be the comfort levels of the attorneys for the different monetizers about whether you see very large sums of prepaid rent and then larger amounts of variability in that contract, or smaller upfront payments, but more fixed components.

Got it, got it. And the other component of the variability of revenue in the quarter was downtime for plants in the quarter where the utility may have done maintenance and shut down and therefore you can't do any work for them. Could you give us some color on maybe how many of your plants may have been affected that way? Or number of days, I suppose? Is that a reasonable question?

I'm not sure I have that, and that also ends up being kind of confidential on the plants. But just about everybody schedules an outage, two to three week outage, in the spring or fall. In addition, there were some unplanned outages that occurred at that time, too.

Okay. And I guess my last question right now is is there anything new you could tell us about what's coming out of the IRS regarding Section 45 and what your monetizers have to comply with?

Well, I think the IRS is not going to put out formal guidance that there's a published document I can guide you to. But the IRS does meet with these attorneys for the various monetizers because these same situations arise in a number of other tax credit-based businesses. And so it's a matter of what they get comfortable with.

And what you're seeing is a number of monetizers, a number of these transactions moving forward tells you that their attorneys are comfortable with what they've heard from IRS in how they're structuring these deals. So I don't think you're going to see anything out of the IRS on the structure issue.

But it seems at this point, we've had two companies that have gone through audits on tax, refined coal tax credits that were produced in 2010. That decreases the uncertainty around it. And so a lot of the delays that we saw over these last 12 to 14 months in getting these monetized, we think maybe eight of those months were due to the uncertainty around the IRS. We think that uncertainty is no longer on the table.

And Greg, this is Mark. I can add that the IRS will continue to issue their private letter warnings, and we as public see those, if they're not ours in particular. And we have had a couple that in particular instances, everyone gets to see those a few months after they are in fact issued. You get some idea of the matters that are coming before them and how they're dealing with those.

Those two were suspended for a time during this period of kind of uncertainty. And that-- they've started reissuing those, so that's good news as well. So we believe that kind of time of uncertainty with the IRS that we've experienced at the end of last year, the beginning of this year is really over now, and not seeing that having an impact with any of our transactions as we move forward.

Good, good. Thanks a lot.

Our next question comes from the line of Ryan Alstead from RBC Capital Markets. Please proceed with your question.

Thank you, guys. Mike could you comment on the possibility of extending the Section 45 tax credits past 2021?

You know, so we can look historically. The Section 29 tax credits for syn fuels was extended, but you do not want to go into Washington asking Congress for anything relative to an increase or decrease in taxes. So this would probably be something that we would look for to do once we got all our units up and running. We might go back to Congress and we'll say, look at how well it's working; let's see if we can get it extended.

Thank you.

(Operator Instructions). Our next question comes from the line of Joe Scott, a private investor. Please proceed with your question.

Good afternoon. In light of the recent increase in the value of the stock, is there any expectation of a split? And if there is, how would the monetizers look upon that?

Well, we have talked about during the proxy about increasing the number of treasury shares to create that as a possibility. So all of that is possible to happen.

But the issue of the monetizer, the monetizer has no say in our stock. So the monetizer only comes in-- each one of these refined coal facilities becomes a separate operating company, and they are investing in those separate entities. So they have no relationship to the buying or selling of ADA shares.

Okay. So the-- if there is a split, it's going to take place in the issuing of more stock from the treasury. Is that correct?

Yes, Joe, that's basically how it's done. So the Company has-- now with our new reorganization in Delaware, we have 100 million shares of authorized cap of common stock, and it would come out of that unauthorized, but unissued, capital at this time. So if there was a stock split, for example, we'd just increase the number of shares outstanding, but really not have any other impact on the capital structure of the Company.

So if there's an issuance of the stock from the treasury, then the Company benefits from the money coming in from that stock to affect their working capital, is that correct?

No. With a stock split, there's really no funds that come in to the Company because they're not a sale of any other stock. It's just that as a shareholder, you would have perhaps two or three shares where you might have only had one before.

Some of the purpose of that is to improve the liquidity and trading in the stock for purposes of some of those market conditions. But it doesn't impact any funds into the Company.

Okay. And is there a projection for that?

Well, as Mike mentioned, it's something that's being discussed. And certainly as we've seen the improvement in the share price, it's one of those things that comes up in our board meeting and other discussions. So it's one that's in discussion.

Okay, thank you.

There are no further questions in the queue. I'd like to hand the call back over to Management for closing comments.

All right. And we thank you for your interest in ADA, and looking forward for announcing coming events and activities over the next quarter.

Goodbye now.

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