Fuel Tech Inc (FTEK) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 Fuel Tech, Incorporated Conference Call. My name is Yvette, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the conference. (Operator Instructions). I would now like to turn the call over to Tracy Krumme, Vice President of Investor Relations and Corporate Communications. Please proceed, ma'am.

Thank you very much. Good morning everyone, and thank you for participating on today's conference call to discuss our third quarter results. Joining me on the call is Doug Bailey, Chairman, President, and Chief Executive Officer; Dave Collins, Senior Vice President, Treasurer, and Chief Financial Officer; and Ellen Albrecht, Vice President and Controller. As a reminder, the matters discussed in this conference call, except for historical information, are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in our forward-looking statements.

The factors that could cause results to differ materially are included in our filings with the SEC. The information contained in this call is accurate only as of the date discussed and investors should not assume statements discussed in this call remain operative at later date. Fuel Tech undertakes no obligation to update any information discussed in this call, and as a reminder, this conference call is being broadcast over the internet, and can be accessed at our website, www.ftek.com.

With that said, I would now like to turn the call over to Doug Bailey. Doug, please go ahead.

Thank you, Tracy, and good morning to everyone. We appreciate all of you joining us on this call this morning. Our financial results for the third quarter include revenues of $20.3 million, an increase of 23% over the comparable prior-year period. We reported net income for the quarter of $0.8 million, or $0.03 per diluted share, which was increase of $0.06 from the third quarter of 2009, and an increased of $0.04 from the second quarter of 2010.

In a few minutes, Dave Collins, our Senior Vice President, Treasurer and Chief Financial Officer, will discuss our financial operating results in greater detail. Dave will also cover our balance sheet in detail, but note that it remains exceptionally strong with cash and cash equivalents of $23.9 million, $35.5 million in working capital, and debt of only $2.2 million. We have an attractive business model which generates a significant amount of positive cash flow when top-line growth occurs. As most of you know, Fuel Tech is a fully integrated company that uses an extensive suite of technologies to provide boiler optimization and efficiency improvements, along with air pollution reduction and control solutions to both utility and industrial customers worldwide. For reporting purposes, we broadly grouped those technologies in to two principal business segments.

One is a return on investment driven specialty chemical business for efficiency improvement that we call FUEL CHEM, and the second is the regulatory part business for Air Pollution Control, or APC, that consists of engineering design services, a large portion of which are capital project related. So let's begin with our FUEL CHEM business where segment revenues were $10 million for the quarter, down 3% for the comparable 2009 quarter, but up 4% from the second quarter of 2010. Gross margins increased to 53% for the quarter, up from 42% in the same quarter last year. This margin increase is principally due to risk-shared demonstrations and associate costs that were presented in the third quarter of last year, but that were not repeated in the third quarter of this year. While electricity demand today still remains sluggish as we have reported to you in prior calls, the recent trends are encouraging and showing improvement over last year.

Coal power generation through the first half of 2010 was now up 3.5% year-over-year and coal-fire generation was up 6%, though production remains below pre-recession levels. Nevertheless, coal-fire generation continues to account for 45% to 50% of total power production. Despite the sluggish economy and weakness in the power market, this was still the strongest nine-month period in terms of revenue recorded for our FUEL CHEM business.

While we continue to be impacted by a number of plants that are running below expectations as natural gas and alternative energy sources run heavier loads, we are winning new business in this challenging environment, and commencing new programs in coal-fired units which is offsetting some of the revenues lost from units that have been running at reduced power levels, or even shut down for periods of time. As power-generating stations continue to be under pressure to achieve maximum availability, higher efficiency and minimum environmental emissions at the lowest possible cost, fuel flexibility has become more critically, financially, and operationally than ever before.

The growing divergence in pricing for major US coal fields is a significant driver for our business, as utilities are increasingly attracted to the compelling economic benefits of shifting from Appalachian goals, generally one of the fuels with the highest heat content (inaudible), to the lower-priced yet lower quality coals originating in the Illinois Basin and Powder River Basin. Given the slagging and fouling challenges caused by high levels of sodium found in Powder River Basin coals, and iron and sulphur found in Illinois Basin coals, this ongoing to shift in fuel preference should enable Fuel Tech to market its programs to an expanded base of Illinois and Powder River Basin coal users.

Additionally, as gas prices remain low, coal units are having to complete with lower cost gas units and, therefore, looking for increased fuel flexibility to be more price competitive. This trend is evidenced by four new TIFI, or Targeted In-Furnace Injection, contracts, two that were awarded during the third quarter, and two that were awarded subsequent to the quarter end. Of these four awards, three were the result of utilities switching to PRB and Illinois Basin fuels.

Turning to our Air Pollution Control Business segment, we generated revenues of $10.3 million in the third quarter, up 66% from the comparable 2009 quarter. This increase reflects favorable timing of the completion on existing capital project orders for pollution control equipment. Gross margins were 34% compared in the quarter -- the same period a year ago, and this reflects the Company's ability to maintain margins despite a fluctuation in product mix.

During the third quarter, we announced contract awards with a value of $8.8 million. Our APC backlog at September 30th, was $20.3 million, down 3% from the $21 million in the second quarter of 2010. We were pleased during the quarter to have received NOx reduction projects on three coal-fired boilers from a major domestic power producer, as part of a larger alliance agreement calling for the supply of SNCR systems and related services for multiple coal-fired generating units.

We have already received SNCR awards for five units from this alliance partner, and we anticipate announcing additional orders very soon. Quotation activity in the APC segment remains quite active, very robust, due in part to the EPA's proposed transport rule, which was initially released on July 6, 2010, and is expected to be finalized in June 2011. If you have listened to our calls before or have followed the progress on this topic, you'll recall that the transport rule is intended to replace the clean air interstate rule, or CAIR. CAIR was issued by the EPA in 2005 with the intent to reduce sulphur dioxide and nitrogen oxide emissions in 28 Eastern states. The rule was vacated by the US Appeals Court for the District of Columbia on July 11, 2008, and subsequently modified in December 2008, allowing it to remain in effect until a new rule was promulgated by the EPA.

The transport rule is the EPA's response to the court's concern. While proposal timing is generally known, the reduction levels are not, creating uncertainty for utilities regarding which units should be upgraded versus which should be shut down. With the master set of regulatory proposals and start dates anticipated over the next two to five years, utilities have a very complex set of decisions ahead to address compliance. While equipment solutions range broadly in terms of their cost, Fuel Tech should benefit as utilities or power producers favor the more lower-cost, capital-cost solutions given the uncertainty surrounding future regulations.

Additionally, the rule will begin compliance in 2012 leaving utilities with very little time to comply, particularly when considering the rules will not be finalized until mid 2011. It is uncertain if the final transport rule will allow for intrastate trading of (inaudible) allowances only, or if it will include a defined level of interstate trading. With more extensive trading, our combustion technologies (inaudible) are flexible, low capital cost solutions that have actually thrived in cap and trade environments. With limited trading, our combined technologies with our advanced SCR approach, can approach NOx production levels of conventional SCR systems with very significant capital savings.

So no matter the outcome, as perspective customers take their steps towards eliminating their -- implementing their compliance plans in a capital-constrained environment, we believe with our lower capital cost solutions, our broad suite of technology that enable an unlayered approach, and our shorter lead time installations, Fuel Tech will benefit from this accelerated compliance as our technologies become the preferred solution for NOx control. Other APC opportunities are emerging on the industrial market where the boiler maximum achievable control technology and solid waste incinerator rules are expected to be finalized in December. These EPA requirements potentially affect more than 1,600 plant sites, and include stringent controls for a number of pollutants. The final form of these complex rules still remains uncertain, but compliance would be required by 2013, creating near-term opportunities for Fuel Tech.

Now turning to the China market, we have seen the level of activities increase as APC projects have been announced since December 30th of last year. During the third quarter this year, we were awarded a NOxOUT SNCR project at an industrial in Guangzhou City, the capital of Guangdong Province. This project is designed to satisfy NOx emission requirements in anticipation of the November Asian Games represented our fourth NOx control order and eighth unit award in Guangzhou City. The Company also received its first ULTRA project on two district heating units in China. And China is and will be an increasingly active market for Fuel Tech ULTRA technology, and we are pleased to be fulfilling this significant and growing need. We anticipate further order announcements yet this year.

Similar to the domestic US APC market, the market in China is dependent upon regulatory requirements. As we have consistently stated, we believe this market will emerge in a major way when the country's Twelfth Five-Year Plan goes in to effect in 2011. After soliciting public opinion and analyzing economic data, China will set specific targets for economic growth, economic restructuring, consumer prices, environmental protection, and low carbon development in the plan, which should be approved in March 2011.

Based upon the NOx emission control policy guidelines which were already released in January of this year by China's Ministry of Environmental Protection, we do believe that our broad suite of low-capital cost technologies fit very nicely into the specific NOx control technologies called out in that policy. In particular, our unique ability to combine technologies on a project-specific basis, ranging from low NOx burners and over fire air to NOx reducing hybrid systems affords us a competitive position in bidding on power plant units that are as small as 50 megawatts to as large as 1,000 megawatts.

We have seen an increased order flow from discussion with power plants and industrial units in anticipation of these upcoming regulations, additional bid activities for combination systems requiring multiple fuel technologies have increased as well. And you will recall that we announced our first low NOx burner and over fire projects in China earlier this year. As stated in the publication of the government's NOx control technology policy directive, which sets the framework for Twelfth Five-Year Plan, low NOx combustion technology are the first priority consideration for retrofit plants. So much work has gone into positioning Fuel Tech for the important NOx control market in China, and just yesterday, Dr. Linda Lin and our Beijing Fuel Tech team posted and organized the NOx in

Just yesterday Dr. Linda LAN, of our Beijing Fuel Tech team, posted and organized the NOx control and boiler energy efficiency improvement technologies workshop, which was held in (inaudible) a city in the province of (inaudible). The goal of this workshop was to help educate potential clients on systems to alleviate ever-worsening air-quality issues, by helping the power sector to utilize fossil combustion and generate fossil power at higher efficiency.

Over 200 participates were in attendance, including power plant managers and engineers, utility owner executives, senior personnel with environmental engineering firms, and government officials. The need for ongoing information exchange in the areas of air pollution control and energy efficiency was quite evident by the interest of participates and sponsors associated with this workshop. It enabled Fuel Tech to showcased its technologies, we believe this latest workshop will facilitate our sales efforts and help become successful in China over the next decade.

Now I would like to turn the call over to Dave Collins to discuss in greater detail our financial results. Dave?

Thank you, Doug, and good morning everyone. As Doug mentioned, consolidated revenues for the September quarter increased by $3.8 million, or 23% to $20.3 million from $16.5 million in the same prior year quarter. Further, our consolidated revenues for the nine months ended September 30, 2010, increased $4.1 million or 8% to $56.8 million from $52.7 million in the prior year. During these periods, we enjoy year-over-year and quarter-over-quarter increases in both domestic and international revenues.

Our domestic revenues for the quarter and year-to-date periods increased 21% and 8%, while our international revenues also increased for both the quarter and year-to-date period by 35% and 7%, respectively. Net income for the current quarter improved $1.5 million, or $0.06 per share, to $817,000, just $0.03 per share from a loss of $698,000 in the same prior year quarter. Our fuel count segment reported its highest quarterly revenues for 2010, totaling $10 million for the current quarter, and totaled $29 million for the first nine months of 2010. While the quarter revenues were essentially flat with the prior-year period, the nine month's revenues increased $506,000, or 1.8% over the prior year.

As previously discussed, contributing to the nine-month revenue growth was the one-time bridged share payment recognized during the first quarter, which totaled approximately $2 million and it related to a successful demonstration conducted during the second half of 2009. As of September 30, 2010, the Company did not have any contingent risk-share payments of this kind outstanding. For the first nine months of 2010, our coal-generated revenues have increased by $799,000, which does include the $2 million risk share payment mentioned, or 3%, offset by a decrease of $294,000 or 10% in our non-coal fired unit revenues over the same prior-year quarter.

Thus far in 2010, we have announced four new commercial FUEL CHEM programs just yesterday. Of the four new additions, one unit began pumping during the first half of this year. The additional three are expected to start up prior to year end. Our international FUEL CHEM demonstrations are ongoing, despite current delays at customer sites. These delays are of customer origin and we remain ready to complete the demonstrations upon notification.

APC segment revenue increased by $4.1 million, or 66%, to $10.3 million from $6.2 million in the prior year. For the first nine months of 2010, APC segment revenue increased by $3.6 million, or 15%, to $27.8 million from $24.2 million.

Our backlog of $20 million at the end of September is comprised of domestic backlogs of $15 million and international backlogs of $5 million, which does include $4 million for China. We anticipate that a large portion of the current backlog will be worked on during the remainder of 2010. We have announced bookings of $8.8 million during the third quarter, and we expect to see continued order activity in the APC segment as Air Pollution Control regulations are further clarified, and as international business continues to expand.

On a consolidated basis, gross margins increased 4.2% in the third quarter to 43.3% from 39.1% in the prior year. Consolidated gross margins for the nine-month period increased by 3.8% to 43.5% from 39.7% in the prior year. Quarterly gross margins for the FUEL CHEM segment increase 10.3% in the current quarter to 52.5% from 42.2% in the prior year. This increase was principally driven by costs associated with demonstrations that were in a risk-share period in the same quarter of 2009.

The nine-month gross margin for FUEL CHEM has increased by 10.2% to 51.7% from 41.5% in the prior year. Approximately 3.5% of this six-month margin improvement was due to the risk-share revenue recognized in the first quarter, with the remainder of the margin improvement due to the demonstration costs recognized in the prior year. FUEL CHEM segment gross margin for the remainder of 2010 are expected to be in line where historical levels.

Gross margin for the APC segment improved marginally for the current quarter to 34.3% from 33.9% in the prior year. Gross margin percentages for the nine-month period declined 2.6% to 35% from 37.6% in the prior year. Contributing to the lower gross margin was a more concentrated mix of lower-margin equipment and installation projects. Specifically, we have a large equipment order that combines significant low-margin installation work, and will continue for the remainder of 2010. We therefore expect that our APC segment margins will remain compressed for the remainder of this year.

Our core project margins continue to be in excess of 40%. Selling, general, and administrative costs for the current quarter were $7.8 million, essentially flat with the prior year total of $8 million. Our SG&A costs for the first nine months of 2010 are down $1.8 million, or 7%, to $23.3 million from $25.1 million in the prior year. The majority of this positive variance for the nine-month period can be attributed to reduced personnel-related costs, which includes reduced stock compensation expense of $912,000, reduction of unutilized corporate resources of $1.2 million, and other expenses including outside consultants of $487,000, offset by increases in personnel-related cost, which include incentive plan expense and recruitment fees for executive officer positions of $825,000.

We expect our stock-compensation expense charged to be further reduced from our current levels by approximately $1.2 million on an annual basis in 2011, as the large 2006 grant becomes fully vested. We will continue to monitor our SG&A spending and where needed take action to maintain reasonable spending levels. Also reflected in the current quarter is a $768,000 gain from the revaluation of the contingent liability recorded in connection with the acquisition of substantially all of the assets of Advanced Combustion Technology in January 2009.

Investment of research and development activity was up slightly in the current quarter and nine-month period over the prior year. This increase is primarily attributed to expenditures related to new FUEL CHEM product offerings. We continue to look for specific development opportunities within our existing portfolio of products, and will be opportunistic in identifying new development projects as our markets continue to develop. Our tax rate for the remainder of 2010 is expected to be 46.1%, down slightly from the 50% used in the prior quarter. This rate is reflective of the expected impact of permanent items within the overall rate reconciliation, and is dependent on the current level of pre-tax operating profit realized by the Company.

Any increase in our operating profits above expected levels will dilute the permanent add backs and reduce our overall rates. Net income for the current quarter improved by $1.5 million to $817,000 from a loss of $698,000 in the prior year. Our nine-month net income has improved by $3.3 million to $722,000 from a loss of $2.5 million in the prior year.

Included in our reported results for the three and six-month periods of 2010 are non-cash stock compensation charges of $1.2 million and $3.7 million, respectively. Our cash balance increased by $2.9 million during the first nine months of 2010 to $23.9 million and our working capital is $35.5 million. We continue to generate strong cash flows from operations, and through the first nine months I reported a positive cash flow generated from operations of $4.7 million.

Cash used in investing activities was predominantly related to the purchase of equipment for our FUEL CHEM demonstrations and commercial programs. Cash used in financing activities is attributed to a repayment of a portion of debt in China used for the startup of our Beijing Fuel Tech office. Fuel Tech's domestic and international market interests and sales activity continues at a strong pace, especially in our APC business segment. While we are encouraged about the business prospects for the remainder of 2010, we do not believe that it's prudent to provide any additional quantitative revenue or earnings guidance at this time.

Now I would like to turn the call back to Doug.

Thanks, Dave, for that report. Just to echo what Dave has stated, we are encouraged by the outlook of our business, so we've come through a recessionary period, and yet we see some strong signs of opportunities for our business, the quotation activity level has now increased dramatically, and we look forward to presenting a good plan for 2011.

I know you have a number of questions, and we would like to turn the call back to our audience to ask questions of the team here at the table, and give you further insights into how we look at our business. So back to the operator.

(Operator Instructions). Your first question comes from the line of John Quealy with Canaccord Genuity, please proceed, sir.

Hi, good morning, everyone. Going back to the backlog, I just want to make sure I heard you correctly, about $20 million in APC backlog, did you say the large portion of that would be recognized in Q4? And if that's true, can you try to give us a little bit of quantification is that 50%, 60% is going to be recognize in that period?

You are correct. A large portion, I think will roll somewhere between four and six as of year end from that current backlog. We expect to continue booking orders here in Q4, so what that number is, is somewhat of moving target, but you are correct, the $20 million as of the end of Q3, you know, 50%, 60% would be right.

Okay. And then again, just another clarification, on the stock-comp expense, it sounds like the five-year vesting has stopped on the 2006. And usually -- does this have to do with -- I think you give some board-level grants in the June quarter, so should we see the step-down in the expense in the June quarter or can you just help give us a little bit more detail of what we should look for in 2011?

Sure, the stock-compensation charge is vested over four years. The grant that we're calling out in the call here is related to employee grants; it does not include the director grants. So it was a separate grant done in 2006.

And, again, the quantification is on the employee plan is $2 million savings; is that right? Or did I hear that wrong?

$1.2 million.

$1.2 million, okay.

(inaudible), so you have to keep in mind, that's the grant that's rolling out from 2006. It was a somewhat inordinately large grant. Whether or not we continue that going forward, it depends on the decisions of the Board and executive management, but will expect to continue granting some stock in the future, so it's not a complete elimination, I guess.

Right. No, that's helpful. And back to the base business. Can you talk a little bit about China? You have had some good success there. We have heard from competitors that sales cycles seem to be lengthening. Can you just comment on that and talk about the level of competition both in country and ex-pats on how that opportunity is shaping up?

Well, I think there will definitely be significant competition both from present participates and additional participants as the country really accelerates its spending. All of our projects, typically, have a long sales cycle. I don't expect the China market to be dramatically different in sales cycle. However, I will say this, one thing I have observed is the decision-making is very fast in China. Once plans are in place, the policies are known, the mandates are understood. I don't see a lot of slowness in decision-making.

We're trying to position our Company to be recognized as a preferred provider of solutions in those segments of the market where we're best capable of offering the combination of best technology and affordable economics. And so if I were to look forward, I would think that the sales cycle, while it's inherently long in a business like this, may very well be shorter in China than it is here. And understand for Air Pollution Control markets, they are largely related to the level of complexity and planning (inaudible) that customer space in meeting those other directives. So the more clarity you have with your regulations, it's, it becomes pretty capable for our customers to put their plans in place.

I think Fuel Tech will be particularly competitive where moderate levels of NOx reduction are mandated. I think it's positioned to be competitive where larger levels and large -- at larger plants are required, particularly for some of the more inferior coals that China burns. And that's why we position the technical solution portfolio to range across all markets. So we're quite confident that the time frame for decision-making will accelerate given the way decisions are made over there, but I think you're going to see that after March of 2011 when the regulations are fully and firmly in place.

Okay. Thank you. And my last question, with regards to the costs and commodities side of the business on FUEL CHEM, I assume you didn't hit any volume discounts from [anhydroxide]. Can you just comment on pricing for that material as you look in to 2011, please?

We don't have pricing at this time for 2011 if there's discounts and so on. I wouldn't expect it to change significantly.

I think it would be stable.

Yeah, I would think so, too.

Right. Thanks, folks.

Your next question comes from the line of Jeremy Sussman with Brean Murray. Please proceed, sir.

Good morning, this is Lucas Pipes calling for Jeremy. Thanks very much for taking my question. You mentioned in your prepared remarks that the EPA is working on regulations for other emissions from those covered under the proposal transport rule. Could you tell us a little bit more about how this could create new business opportunities for Fuel Tech? Thank you.

These are for emissions of pollutants other than NOx?

Yes. Yes. That's what I meant. Like, mercury, for instance.

Well, certainly the mercury rules have also been influx, and we think that that is going to be a market for the Company. As you know, we don't presently offer a targeted solution for mercury, but we're actively working in the development side of our business to look for that which we think would be one of the better solutions. We both looked in terms of external acquisition opportunities, further R&D development programs with potential partners, as well as patented technologies that could be acquired.

And I think that that market is still a little way off compared to our present market, but we do believe that's an example of one that we could participate fully in. I think there are some significant investments that have been made by certain companies looking at mercury reduction that may not be the sustainable solution. So we're being a little cautious about where we apply our resources to a rather uncertain, but important regulated market.

Thank you very much.

Your next question comes from the line of Graham Mattison with Lazard Capital Markets . Please

Hi, good morning, guys.

Good morning.

So will you talk a little bit more about the alliance agreement and is there potential to expand this alliance agreement that you have right now? Or are you in active discussions with anybody else to try and enter into something similar?

As you know, this isn't the first alliance agreement the Company has had. I think our opportunities will be fully exploited with the present customer. And we expect additional orders to be announced with that customer because of that agreement. I think it's very good way to do business, and I think our success with customers that have been in alliance with Fuel Tech in the past could prove advantageous, particularly as utilities enter into what I'll call a little bit more of a scrambling period to comply with regulations and compliance deadlines that will put them in a fairly suppressed timetable.

We're good to work with in that we can implement quickly, compared to very large costly capital projects, and the ability to work with us in a planned manner for customers that have multiple units at many sites and many states is a nice orderly way to do business. Margins are good for us, costs are good for them, and so I would expect that we would continue to advocate that. We're always in discussion to look for those kind of opportunities.

And then looking at the APC side, on the margin front, looking at the backlog, you have another -- there's been some movement in terms of the margins that you see going from the mid-40% to the mid-30%. What is the right margin level going forward given the backlog mix and what you're seeing?

We typically planned between 35% and 40% depending on the mix of products. Our core projects typically tend to the higher end of that range, around 40%. If we're doing the larger installation projects, you know, that trending toward the lower end of that range. But we typically plan between 35% and 40%.

Got you.

We're contemplating one large project this year that does have a mix of installation work that for quotation and strategic reasons of wanting to do this job, we accepted lower margin on that work, and that's not our core business area. But it did give us an excellent opportunity to demonstrate what we can do in very large complex low NOx burners, and that project is going well, and I think will serve as a very useful demonstration of our capabilities to do projects of greater revenue, scope, and size.

Not only for low-NOx burners, but also for the revenue level of a complex project such as an advanced SCR. So sometimes you accept pricing decisions in order to position yourself for further opportunities, along with completing this year is suppressing margins, but, generally, in that 40% to 50% range has been our typical APC margins, and with the quotation activity that we have today, we don't really see the competitive environment requiring us to quote at a suppressed level.

Alright, great. Very helpful. Thank you very much.

Your next question comes from the line of Rick Hoss with Roth Capital Partners. Please proceed, sir.

Hi, good morning.

Good morning.

Doug, I think last quarter we had talked about the -- I guess the utilization of FUEL CHEM units, and I know some were removed completely. But can you give us an appreciation for a ballpark utilization of these units and with the expectation that as electricity production ramps up and continues to recover, that some of these will start flowing again, some of these will start firing again, and really recover a lot quicker, the FUEL CHEM recover a lot quicker than say new orders would foreshadow?

Sure. And if you combine that statement of increased electricity demand with the choice of fuel, certainly at higher load levels, coals that slag and foul do so at a greater level when they are run at full load. As loads are reduced, some of those fouling and slagging problems are shed on their own and, therefore, the benefit of the FUEL CHEM program is lesser to the customer.

So when you combine higher load levels and the shift as we're seeing to Illinois Basin, Powder River Basin coals that have those fouling characteristics, we think that some existing customer we have that are not pumping will return. We're actively working with those customers to look for opportunities to begin to utilize the systems that are already in place. Some units are just shut down, and that reflects the system requirements of certain customers as the country has been in a unique situation of seeing one of the first periods in time when electricity demand dropped. So we're encouraged by seeing nice moderate increases in demand.

I think you are still in an environment where natural gas prices are going to, in some way, limit how much coal is burned. I think you are also seeing a lot of challenge produced -- put on utilities as to whether or not they are going to continue to operate certain coal-fired power plants, particularly smaller ones. But I believe coal is a mainstay of electricity production in this country. I believe it is going to stay within the percentage range of total demand, roughly speaking.

There will be variations, obviously, customer to customer, but it is still the lowest cost per BTU of heat value. And I think this country is in a great position to benefit from the resources it has. And the reason I say that is that when I look abroad and I see the level of energy demand coming from other parts of the world, particularly China, the exports of our coal are only going to increase. I think that will be good for the domestic utility industry to look to further switch to PRB-type coals, and I think we'll see an environment in which our FUEL CHEM technology will be a mainstay of the utility industry for sometime to come.

But we certainly have been in a period of unusual electricity demand over the last two years. We have noted it, and we have seen a significant effect on our business. So much so that when you look at our year-over-year revenues, a lot of what we have sold has been, certainly partially offset by, units that have gone on stand by. But we think that's going to begin to slowly change.

Right. And especially amplified in a business model that is predicated on power at the margin, right? Which makes increasing sense as rates close in on maximum?

Right.

Right.

The fundamental benefits of the technology remain unchanged under the same load conditions; the economic benefits remain unchanged. I think you see that in our ability to maintain pretty good margins. So it's not so much it's a pricing issue, is whether -- it's a solution that the customer can benefit based upon his load level and his choice of fuel.

Okay. And then, Doug, this is, I guess, more of an opinion. What is your take on the change in composition of Congress? We have been chasing CAIR for a while and now we're chasing Transport Rule, and it's just continually pushed off and pushed off. With this change that we have seen in the House, and maybe this momentum continues, how does this affect the Transport Rule, the timing of it? Does it help it? Does it hurt it? What is your take on that?

Well, I wish I was a better political pundit than I am. Generally speaking, I think it will call into debate the cap and trade policies. I think that Congress has to squarely deal with the overall spending issues of the Nation in order to direct resources to needed environmental activities. I do believe that after a period of uncertainty that clarity will be mandated in 2011.

How much Congress will spend time debating on what that is? It's hard for me to guess. But I think, at least in our suite of products, we are generally well-positioned to be diversified a little bit more than we would have been in the past, regardless of what those policies are. And I particularly think that utilities are going to be more prudent with their capital, and so strategically offering lower-capital cost approaches to emission controls is the right thing for the Company to be doing.

You know, the APC market is regulatory driven. Unless the regulations mandate it, generally speaking, those expenditures are not going to be made. But we believe it is only going in one direction. It's problematic when the rules get thrown out and then litigated or reset. Our customers are looking for clear guidelines, and all we know is it's going in one direction, and we're prepared to give them the solutions they need.

Appreciate that.

I would say that trying to offer you my early, at this point, perception of what our beloved Congress will be doing over the next six months might be guessing at best.

Okay. I appreciate the attempt. Thanks, Doug.

Okay.

Your next question comes from the line of Jeff Osborne with Stifel Nicolaus. Please proceed.

Yes, good morning. I was just wondering -- a couple of questions here on the tax rate for 2011. Do you have a sense of what we should be thinking about for that given the elevated levels here in 2010?

Yeah, I would expect the rate to go down next year. There is a couple of reasons; we're carrying some FIN 48 reserves for some items which will roll off in 2011, and so you'll likely see that come through the rates, so I would expect it to trend down. Now, all of that depends on pre-tax operating income levels, as well.

Okay. Thanks you. Kind of a base case would be in the low 40s, would that be reasonable?

Yeah, that's fair.

And then just quickly, any sense of what depreciation was here in the third quarter.

Year to date is $3.1 million for depreciation.

Okay. And then given all of the moving parts here on OpEx, is this a fair run rate to assume over the next six to nine months, or do you have any kind of hiring initiatives just as the China market might heat up? How do we think about that?

You know, there's some puts and takes to it. I think it's a fair run rate right now. We could go and identify those things that would roll off our list, but then we'll add some things it to. So I think it's a fair run rate.

Very good. And just a last quick one here on the Chinese market with the five-year energy plan and some of the documents that have been released thus far. What's your sense there on timing of compliance outside of the Guangdong region there?Would that the orders kind of similar time frame as the US market for you in late 2011, 2012, or would you expect more activity in the first half?

Let me give you what I think we see our take is. You know, in the five-year plan, they set, you know, plan over that period of time, so by 2015, every operating unit in what they call key point regions must comply with a certain level of NOx emission standards. And the key point regions used to be three in particular broad areas of the country.

They have now included six other regions. So the expanded key point regions have significant incentives now to order NOx control equipment, and expand the business for us as well as other participants over a five-year period. But we -- if we were to try to chart that out in a business plan, I would say that we would see a noticeable acceleration in the 2011, 2012 time frame, and then a fairly -- maybe level to growing activity to meet the 2015 deadline. There's enough work to be done that it's going to fill heavily a four and a half to five-year program.

Another way to kind of gauge what that level of activity would be is -- we were just recently at US/China Environmental Industries forum where a number of China and US companies participated. And I found it very interesting when some statistics were presented by the US Department of Commerce, noting how do we size the world environmental markets? So I offer you this as an macro level perspective.

Last year in 2009, the US market for environmental solutions of all kinds was estimated at about $284 billion. Western Europe, by comparison, another highly developed area was $211 billion. China was $31 billion. So I think if you take a conjecture at comparing the size in gross domestic products of the economies of those three areas, and look at the tremendous resources in terms of financial resources that China how has, and the commitment that will come through in this five-year plan, I cannot believe that we're going to see anything other than substantial growth, covering pollutants of all forms, therefore, benefiting many, many companies.

So Fuel Tech is positioned to participate in that, so I would say that we're looking at measured growth next year that is a significant percent gain over 2010. And I would venture to say that the China market could grow to a size equal to what Fuel Tech is today, inside that five-year plan. So that's just a rough scaling of what I think the opportunity is for the Company.

Thank you. I appreciate the detail. Thank you.

All of that depends on good execution, obviously, and we are committed to putting in place the finest organization that we can because it requires good management skills, good selling skills, backed up by highly competent technical resources to serve that market.

Your next question comes from the line of Dan Mannes with Avondale. Please proceed, sir.

Good morning. A couple of follow-up questions. First on FUEL CHEM, and this is in response to a previous question and answer. You said pricing on the product isn't really an issue, but I know over the last couple of quarters, it seemed like you had margin degradation as maybe some of the units were operating below capacity. And maybe it's not a price increase, but I'm wondering is there a pricing structure, maybe, that you could offer that would better cover your fixed cost, you know, in light of the fact that's some units may not run as much as you had originally modeled?

Yeah, we do offer different products on the FUEL CHEM side, and those products do carry different margins. And so depending on the mix of those, you can see some changes here in the period. And then are also, just in terms of customers, that pricing is done independently, as well. And so if you have a well-priced customer that is generating more business, then you'll see your margins change there, as well. The other component that gets added in is all of the demonstration costs. And so when you have a demonstration running in periods, that's going to impact margins as well.

Right. Understood. I'm just wondering going forward, given some of the things you've run into and given where natural gas is, and that some of these units are going to run at compressed levels for a while, I was wondering if there was any maybe mix shift in contract type or maybe some direction you guys were pushing towards?

Yeah, I think we're going to model it around 50%, that's what we've said in the past. I think that's what we're going to continue.

Got it.

That should take in to account the different variations that we've talked about.

Okay. And following up on another question as it relates to the SG&A line, I think in your prepared commentary you had a couple of items that were non-recurring in nature it sounded like, or looked like they might tick down. That was the non-cash comp. It sounded like some consultants, I don't know if you mentioned what that was for. And third, it sounded like the executive search costs. I mean, do we assume the consulting costs stay, do we assume the executive search costs go away but are replaced by new executive costs. If you could just sort of walk us through that. I was just wondering -- I know you said this was a reasonable run rate; I'm just trying to make sure I understand why.

Yeah. There are always things that come up that you'd like to say it's not going to ever reoccur again, but we incur those costs. We're going through our planning cycle right now. We may look to add some costs to our SG&A line to support our growth expectations, and so if you talk about it as just a gross dollar amount, I'm comfortable saying that our run rates are reasonable right now.

Okay. Because I guess in prior conversations, the indication was that maybe staffing levels were, or staff or Company -- that had the capacity to handle a lot more revenue than the Company was currently doing. So I'm kind of surprised to hear that you're adding. Is that more geography? Is that more China? Or -- because I guess that's a little bit at odds with what we have heard previously?

No, we have not been adding. In fact, whereas we have established an organizational design in September to take advantage of growth opportunities, we actually did so with a slight reduction in overall personnel. I think we have brought in exceptionally highly qualified people into positions that we vacated by those that did not stay with the Company, or we chose to eliminate that position. And, you know, we announced, for example, Vincent Arnone returning to the Company as Executive Vice President of Worldwide Operations. Reporting to him is our China Pacific Rim, Beijing Fuel Tech Group, our European operations, and our entire project execution team.

That's being done at -- in a manner to provide much higher level of coordination worldwide with all of those activities. And Vince was a consultant to the Company, so his salary does replace some consulting fees that we had been incurring. And we actually are now positioned, I believe, to steadily trend to more historical levels of SG&A as a percent of sales that you might have seen a couple of years ago as we position the Company for obviously higher revenues with the organization that we have. So we don't envision significant additions of people in the US. We do have some open positions to fill in China. And that's necessitated by being able to serve the rate of growth that that market will have, as well as the changeover from the talent level that we utilized in the start-up mode to the talent level that we are requiring going forward.

And just to clarify one other thing, of the items that were identified, most of those are reductions. The one increase was the incentive-plan expense, and executive officer recruitment fees for executive officers (inaudible). The lion's share of that is the incentive plan-related expense. So what you are talking about a really a fairly marginal number for the recruitment fees.

Got it. And one last question on the APC side. When you talk about quotation activity increasing, can you talk a little bit about that in the context of the sales cycle, i.e., are these the utility just kicking the tires laying everything out so they can make a decision in nine months when they have visibility on transport? Is there an ordinary level of quotation activity just generally driven by states and consent decrees?I'm just trying to understand what the implications are of this as it relates to timing, and I realize it is very specific by utility, but if you can just walk us through the cycle and where this fits in, that would be helpful.

After orders are announced, we typically have six to nine months lead times to get those orders in. Sometimes there's a three to six-month time period just to spec the job and do the scoping on it. But once we announce, and we do come out with our press releases then, to see those revenues come through our income statement and realize the benefit from that, you do have a fair amount of a tail there. So if we make the announcement this quarter, then, you know, look to see those put through the P&L next year.

No, I'm talking about on the front end. You are talking about quotation activity picking up as a potential indicator of order and backlog, and I'm trying to walk from the quotation activity to the actual order.

The sales cycle itself?

Yeah, that's what I'm more focused on is -- and we have been through this before. You saw it with CAIR. I guess I was hoping you could draw some analogies from a timing perspective and where utilities are in their thinking.

We have a long list of things we have been discussing for some period of time, so it's not as if we're just starting that activity. We typically don't share what that risk is, but it is robust.

Okay.

You know, I would say that if you look at the contracts that were awarded through the first half of the year, they certainly were in discussion, you know, in the early part of the year to achieve those or even late last year, so seeing a six-month sales cycle is not uncommon at all in China.

Okay. I was -- that's fine. I was more focused on US, but maybe we'll take this discussion offline.

I thought you were asking about China.

No, I wasn't asking about China.

US.

US, I would say generally, you saw it this year in terms of our announced contract awards. I think we went through a little hiatus period where sales cycles got longer because of delays and rules.

If I look at the market today, certainly the quotation activity in terms of number of potential projects has dramatically increased on the APC side. APC will still have a pretty doggone good year in terms of the completion of bookings that we came into the year with. We are anticipating a reasonably good fourth quarter relative to new bookings, but, you know, it's very hard to give guidance on APC.

You know, the dollar value of projects vary in size, their timing is often uncertain, and so trying to call our revenues within a few million dollars is very difficult to do. But I think APC is going to finish the year with a very respectable book revenue, and if I see some of the activity that we're quoting come to fruition before this year is over, I think we'll still enter the year with a good backlog.

Okay. Thanks.

You bet.

(Operator instructions). Your next question comes from the line of Carter Shoop with Deutsche Bank. Please proceed.

My questions have been answered. Thank you.

Your next question comes from the line of Steven (inaudible) with Design Capital Markets. Please proceed, sir.

Good morning, gentlemen. Thanks for taking my call. Regarding the FUEL CHEM segment and the depressed demand, I was wondering if you had, or you could provide some clarity on the linkage between electrical generation activity, which is up about 3%, and where the demand -- where do you think the inflection point starts to come in here? If I look back to what we had in the summer, we had a near historic heat wave in the summer, we had peak curtailment activity get very strong in some of the demand response companies, but very little impact on the FUEL CHEM segment. So do you have a sense of what kind of net electrical output in the United States has to be reached in order for FUEL CHEM to start picking up?

It's a good question, and a fair question. I don't think you can specifically answer that as a percent growth rate of electricity demand. Obviously as it grows, it creates a positive wind on our back, but I would say much more depends on the fuel policy that a customer has. Certain coals slag; certain coals don't. They certainly -- if they slag, they slag more at higher loads.

You know, when we look at our business, there are certain accounts that because of their load levels and fuel policies, they are already generating significant economic benefits from pumping and using the FUEL CHEM program. There are certainly certain customers that are operating at levels where those economics are questioned. Now, as demand increases, specific -- in a site-specific way, that only improves the economics, and everything's in place to turn it on again.

I would say we have been relatively challenged this year by trying to get our previous customers to begin pumping again. We've had some success, and we've had an active selling effort to assist those companies in identifying how FUEL CHEM can benefit. But until load levels are higher, that may not be won. But the thing that does change characteristics is choice of fuel.

Right. So in this case, it's the one-two punch of both load levels being reduced and the cheaper Eastern coal mix.

Or cheaper Midwestern and Western coal mix.

Right.

Eastern coals typically are higher cost and higher BTU value.

Right. Now, you had mentioned in your notes earlier about the differential between the fuel pricing. Similar question, different topic there, do you see that there's an inflection point in that where you see a lot more of these customers you have been chatting with reach their tipping point?

A tipping point in terms of realizing that they can enjoy the benefits of FUEL CHEM?

Yeah, just in an aggravate sense. If the differential between the coal pricing is enough and their load is, for all of those things being equal, back to where it was in 2007? Do you see that the market is nearing that point for a lot more of these customers?

Yeah, I think we're beginning to see a favorable direction. As I said earlier, three of the four awards we just announced for TIFI FUEL CHEM programs were as a result of switching PRB and Illinois Basin coals. Certainly, the market conditions are changing, the pricing of those coals. And I think that we will continue to see that trend for a while. Now there is the challenge coming from the low-cost of natural gas, and that cannot be ignored as certain utilities choose to meet their BTU requirements, for example, with natural gas.

Right. Right.

I think that probably remains a bit of an overhang on the market.

All right. That's very helpful. Thank you.

Okay.

No further questions in the queue. I would now like to turn the call back over to Doug Bailey for closing remarks. You may proceed, sir.

Thank you, operator. And thank you for all of your questions. They were all good questions. We always look forward to reporting on the activities of the Company. I think in my involvement with the Company over this past eight months, I'm very energized by the organization and the effort that people are undertaking to prepare what I believe will be a nice exit to 2010, and a very strong year for us for 2011.

Obviously, we have a lot of complex planning issues in this business because our customers do, but we are certainly making great headway in creating the organizational staffing, the talent level to meet those needs of those customers, and we look forward to meeting with many of you on a one-on-one basis to answer your questions and give you further insight into how we see our business.

So we thank you for the call today, and we appreciate your attendance. Thank you to my colleagues around the table, and we look forward to chatting with you more in the future. Good-bye everybody.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.