Fuel Tech Inc (FTEK) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter 2011 Fuel Tech Inc. earnings conference call. My name is Lacey and I will be your coordinator. At this time, all participants are in listen-only mode. Later we will facilitate a question and answer session towards the end of the prepared remarks. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call Ms. Tracy Krumme, Vice President of Investor Relations and Corporate Communications. Please proceed.

Thank you, Lacey. Good morning everyone and thank you for participating on today's conference call to discuss our second-quarter results. Joining me on the call this morning is Doug Bailey, Chairman, President and Chief Executive Officer; David 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 and could cause actual results to differ materially from those set forth in our forward-looking statements. The factor that could cause these results to differ are included in our filings with the SEC. Information contained in this call is accurate only as of the date discussed and investors should not assume that statements made in this call remains operative at a later date. Fuel Tech undertakes no obligation to update any information discussed in this call. And, as a reminder, this 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 everyone. We appreciate all of you taking the time to join us on this call this morning.

Fuel Tech's financial results for the second quarter include revenues of $19.0 million, which were flat from the comparable prior-year period. We reported net income for the quarter of $0.4 million or $0.02 per diluted share which compares to a net loss of $0.3 million or $0.01 per diluted share in the prior year.

In a few minutes, I will ask Dave Collins, our CFO, to discuss our financial statements in greater detail. Our balance sheet remains strong with cash and cash equivalents of $30.7 million, working capital of $41.1 million and debt of only $2.3 million.

So, let's begin with our Air Pollution Control, or APC business segment. I am pleased to announce that after a slow first quarter with weak bookings, order activity has now improved. We announced contract wins of $11.8 million in the second quarter with an additional $6.9 million in contract wins announced subsequent to the quarter end. Order activity benefited from strong interest in our pollution control technologies in both the US and China.

On the domestic regulatory front, we have some good news to report as the EPA finalized a rule on July 6 which replaces the remanded the Clean Air Interstate Rule, or CAIR. This much-anticipated and new final rule, called the Cross-State Air Pollution Rule, CSAPR, or what many refer to as CASPR, which is what I will refer to it, replaces the Clean Air Transport Rule, which was proposed in July 2010 and was the previous EPA proposal to replace CAIR.

Among other requirements, CSAPR focuses on NOx emission reduction beyond those originally required by CAIR through additional air pollution control reductions from power plants beginning in January 2012 with a second phase starting in January of 2014. CSAPR has several key features, including the allocation of emission requirements to individual sources directly by EPA and the trading of allowances which are controlled by state-specific emission limits.

By 2014, power plants in states common to both CSAPR and CAIR will achieve annual S02 emissions around 1.8 million tons lower and annual NOx emissions around 76,000 tons lower than what would have been achieved at that time under CAIR.

CSAPR has several key differences from the previous transport rule, the first of which is that the new rule is significantly more stringent than a draft of the transport rule. Not only does the final rule establish tougher limits on emissions of S02 and NOx, but it also changes the allocations of emission cuts across the states. Previous proposals suggested that there would be unlimited intrastate and only limited interstate trading; however, CSAPR does not distinguish between the two and unlimited trading is permitted. State emission caps are designed to mitigate the emission impact on downwind states by specifically controlling emissions from upwind states. If sources within a state cause that state to exceed its assurance limit, then penalties are severe. They include a 2-for-1 reduction based on the sources contribution percentage of the state overage.

In these situations, allowances acquired by a sources via trading will not help a source avoid these penalties which creates significant incentives for individual operating units to be at or below their emissions allocations.

Several states in the Midwest were included in CSAPR while some states in the Southeast now only have to comply with NOx garments during the ozone season and several eastern states were not included in CSAPR. For S02, there are two groups of states and trading is only about allowed within each group. The NOx allocation provided to sources in Illinois, Kansas, Michigan, Nebraska, Pennsylvania and Texas shows shortages compared to 2010 annual emission rates while Louisiana, Ohio, Illinois and Florida are the states where NOx emission rates exceed the allocation for ozone season operation.

As a result of the issuance of the CSAPR ruling, we have received numerous calls from existing and new domestic customers who are planning their strategies to meet their NOx compliance needs. Where individual plants are facing allocation shortfalls, especially in those states with tight emission limits, utility operators are turning to Fuel Tech to help them meet the requirements in a timely and cost-effective manner. Our SNCR technology can be deployed very quickly to meet very compressed schedules where reducing NOx emissions starting in January 2012 may provide significant benefit to those sources.

Besides the near-term SNCR opportunities that are created by CSAPR and the immediate need for quick turnaround systems for sources with allocation shortfalls, other opportunities exist for the sale of our APC technologies. The CSAPR 2012 deadline could create short-term combustion tuning needs for utility boilers as well as SCR services to manage catalyst performance to maximize NOx reduction. Additionally, there's the potential to install an SNCR in front of SCR systems to maximize reduction across all boiler loads.

The CSAPR 2014 requirements for significantly lower NOx emissions create combustion tuning and low NOx burner over-fired air opportunities for Fuel Tech as well as SNCR and advanced SCR opportunities as part of a layered NOx reduction strategy.

Now there are other APC opportunities that have emerged in the industrial market. The Boiler Maximum Achievable Control Technology, or MACT, and the Solid Waste Incinerator Rules were issued on March 21, 2011 with a new proposal expected in October and a final rule expected in April 2012. Compliance will be three years from the final rule. These EPA requirements potentially affect more than 1600 plant sites and include stringent controls for a number of pollutants.

These complex rules have been revised since the June 2010 draft and they now specify emission limits that are more realistic. These new regulations create near-term opportunities for Fuel Tech, particularly on units where improved combustion is required to meet carbon monoxide emission requirements leading to NOx control needs and where biomass may be utilized as a fuel source as states strive to meet renewable portfolio standards.

Additionally, earlier this year on March 16, 2011 the EPA issued its Air Toxics Rule, also known as Utility MACT. This rule affects utility boilers greater than 25 megawatts and is aimed at reducing the release of mercury, arsenic and certain other toxic air pollutants from new and existing coal- and oil-fired generating units. The final rule is expected on November 16, 2011 with compliance in 2014. As part of the reform, the EPA also proposed changes to the source performance standards governing emissions of particulate matter, SO2 and NOx.

So as you can see, the pace of new US EPA regulations affecting utility plants and industrial units has been accelerating on the timetable that we've been anticipating. Several new guidelines limit a variety of emissions which will require additional investment in NOx controlled technology. Finalizing these regulations in a timely fashion will provide the industry with certainty needed to proceed with a market response, modernize the electric generation fleet and allow the lowest cost and most efficient approaches which is exactly what Fuel Tech can provide.

In China we continue to see strong interest for our APC technologies, especially for ULTRA, which provides for the safe and cost-effective on-site conversion of urea to ammonia for use as a reagent in the selective catalytic reduction of NOx. During the quarter we received orders for five ULTRA systems from three different major utilities, all of which were repeat business from existing customers. We've now contracted or completed ULTRA projects on over 13,000 megawatts of generating capacity in China as well as installing over 50 commercial ULTRA systems in the US, Europe and China.

So we're pleased to be satisfying this growing interest in our ULTRA technology as worldwide recognition of the need for safer delivery and storage of ammonia reagent to NOx reduction equipment increases.

Similar to the domestic US APC market, the APC market in China is also dependent upon revelatory requirements. As part of its 12th five-year plan that was introduced on March 5, 2011 and will soon be finalized, China will tighten pollution control standards for its existing fleet of fossil fuel plants as well as for fossil plants to be built in the future. In anticipation of the finalization of this plan, China's Ministry of Environmental Protection has issued several documents describing the specific nature of the regulations to be implemented in support of reducing harmful pollutants and further defining the technologies recommended to achieve that reduction.

The most recent documents define the regulations for NOx as applying to all thermal power units that have a steaming rate of 65 tons per hour or larger, which is about 12 megawatts. Newly constructed units and existing units that were approved subsequent to December 31, 2003 must meet the same stringent emissions standard while existing units approved prior to December 31, 2003 must meet a standard that is less stringent.

In addition, all units that are in key point regions must achieve the same standard as the newly constructed units. And key point regions are defined as those areas that are highly developed or highly populated and are sensitive to environmental overloading. All existing coal- and oil-fired thermal units must comply with the proposed regulation by January 1, 2014 while all new units must be compliant by January 1, 2012.

These same documents recommend that NOx reduction should be achieved via the use of low-NOx burners and over-fired air systems in combination with SNCR or SCR where appropriate to achieve required emission levels. The combination of SNCR and SCR technologies in tandem is also considered a viable choice.

As we've stated before, we believe our portfolio of low capital cost technologies will be effective in helping fossil fuel plants address the NOx emission control policy guidelines that have been released in China thus far. In particular, our unique ability to combine technologies on a project-specific basis ranging from low-NOx burners and over-fired air to NOx-reducing hybrid systems affords Fuel Tech a competitive position in bidding on power plant units of all sizes. While the administration has not yet come forth with its final ruling, we do expect it to be soon and as a result we have seen an increased level of activity in order flow from power plants and industrial units. Bid activities for combination systems requiring multiple technologies have increased as well and we anticipate additional orders in China in the near future.

Now with regard to Fuel Tech's FUEL CHEM segment, despite the difficult market conditions that we continue to face, our results are in line with our expectations. The economy, while showing some signs of recovering, still remains very sluggish and it is especially weak in the utilities sector where we have seen plants shut down, assets sold and operating budgets quite tight. Coal-fired generation was down 3% in June and the US Energy Information Administration, or EIA, projects that coal consumption in the electric power sector will fall by 2.5% in 2011 as electricity demand remains flat and generation from natural gas and renewable energy sources increases.

Natural gas prices remain low currently at a spot rate of $4.26 per million BTUs, which was 11% lower than the price of $4.77 per million BTUs one year ago. These low natural gas prices does put pressure on coal-fired power production as some plant operators will run cleaner gas units and prevent the slagging and fouling issues that they would have if they burned Illinois Basin or Powder River Basin coals. That dynamic, combined with lower electrical demand and the rise of alternative fuels has caused certain coal customers to operate at reduced power levels or shut down for a period of time which means our revenues per unit are dramatically lower in some cases.

Although there are warmer temperatures now occurring, coal-fired baseloads remain off-peak with many plants still seeing nightly load drops. Other plants have made decisions to change normal operating parameters on unit levels that minimize flagging issues. Additionally, the access of hydroelectric power has impacted us this year, particularly in Washington and North Dakota where some coal-fired customer units have remained off-line this year until now.

So given the sluggish economic environment, fuel flexibility continues to be our driver for new sales as plant operators make it a high priority both for financial and operational purposes. This is in due in part to the spread in US coal prices which continues to be a driver for our business as utilities are attracted to the economic benefits of shifting from central and northern Appalachian coals, which is generally one of the fuels with higher heat content and fewer operational issues, to the lower-priced, lower quality PRB and Illinois Basin coals. Given the slagging and fouling challenges caused by high levels of sodium which are found in PRB coals and high levels of iron and sulfur typically found in Illinois Basin coals, this ongoing shift in fuel preference should enable us to market our programs to an expanded base of Illinois and Powder River Basin coal users.

Thus far this year, we have announced the receipt of three FUEL CHEM orders, two of which were commercial and one of which was a demonstration. Two of the awards were for SO3 mitigation, with a third being the result of slag formation caused by burning lignite. The lignite of course is a lower-ranked coal based on its heating value and is used almost exclusively for steam electric power generation. There are about 40 lignite units currently operating in the US, so lignite does represent an attractive market for our Targeted In-Furnace Injection, or TIFI technology.

In another area of news, I'm pleased to announce that we have selected two new independent members to our Board of Directors, Mr. W. Grant Gregory and George MacCormack. Grant Gregory serves as Vice-Chairman of Cerberus, one of on the largest private equity firms, and serves as chairman of his own merchant banking firm. He retired as chairman of the board after completing 24 years with Touche Ross & Company, or Deloitte Touche Tohmatsu, where he played a leadership role in opening the firm's first office in China, served us an advisory to the Ministry of Finance for the early joint ventures there. Grant is an authority in corporate governance, audit committees, compensation committees as well as mergers and acquisitions and tax policy and has served successfully in numerous leadership roles as chairman of the board, CEO, merchant banker and director of public, private and nonprofit corporations. His extensive experience coupled with this in-depth knowledge of the China market should provide invaluable service as we intensify our efforts to penetrate the international utility and industrial markets.

George MacCormack is a retired group vice president of Dupont where he held a variety of progressive positions over 35 years. As group president, Mr. MacCormack had a corporate oversight responsibility for approximately 12,000 employees and a $6 billion revenue portfolio of capital and energy-intensive global strategic business units. During his career, Mr. MacCormack was credited with leading a transformation of the specialty chemicals business unit through restructuring asset sales and targeted growth. He has served on the Board of Directors of a large public electric utility for the last nine years and has served as executive chairman and vice chairman of the board for four major joint ventures with international partners in Japan, Turkey and Mexico. George MacCormack's depth of knowledge in the chemical industry as well as his corporate oversight and governance responsibility experience make him a very valuable addition to represent the interest of our stockholders.

So now, I would like to turn the call over to Dave Collins, Senior Vice President, Treasurer and Chief Financial Officer who will discuss our financial results in greater detail. Dave, over to you.

Thank you, Doug, and good morning everyone. While bookings in our domestic APC business for the first half of 2011 has (technical difficulty) slowing due to the finalization of the EPA regulations our (technical difficulty) APC markets have had a good first half of the year and our FUEL CHEM business has been growing.

Consolidated revenues for the June quarter and first six months were $19.0 million and $41.6 million respectively. These results were consistent with the same prior-year quarter and reflect an increase of $5.1 million or 14% versus the same six-month period of 2010. Our FUEL CHEM segment reported sales of $20.9 million for the first six months of 2011, and while our APC segment revenues increased 18% to $20.7 million over the prior year. Our backlog at the end of June was $15.3 million. We recorded net income of $1.7 million for the first six months of 2011 while our operating income for the first six months has improved $3.6 million over the prior year. Our adjusted EBITDA for the first six months of 2011 was $7.2 million compared to $4.5 million in the prior year, representing an increase of $2.7 million or 60%.

Now I would like to talk about each of our segments in more detail. Our FUEL CHEM segment reported revenues of $9.4 million for the current quarter and $20.9 million for the first six months of 2011. While our quarter revenues were down slightly from the prior-year period, our six-month revenues have increased $1.9 million or 10% over the prior year. Attributing to this year-over-year growth was a one-time pass-through of low-margin installation services totaling approximately $1.3 million. Additionally, the FUEL CHEM revenue for the first six months of 2010 included a one-time risk share payment totaling approximately $2 million which related to a successful demonstration conducted during the second half of 2011.

Excluding these two anomalies, our FUEL CHEM revenues for the first six months of 2011 have increased 15%. This increase is attributed to new customer accounts. For the current quarter our FUEL CHEM revenues generated from coal units increased 3% while revenue from non-coal units non coal units increased 5%.

For the first six months of 2011, our coal-generated revenues have increased by $1.7 million or 9.7% compared with an increase of $200,000 or 12.7% in non-coal-fired unit revenues over the prior year.

Thus far in 2011 we have announced four new FUEL CHEM programs, three commercial accounts and one demonstration. Of the four new additions, two units began pumping during the first quarter and the other two will come online during the third quarter. As of June 30, 2011 the Company did not have any contingent risk shared payments outstanding relating to any demonstrations.

Quarterly gross margin for the FUEL CHEM segment decreased 4.4% in the current quarter to 43.4% from 47.8% in the prior year. This decrease was driven by costs associated with an international demonstration and a previously mentioned large, low margin pass-through. The six-month gross margin for FUEL CHEM has decreased 4.9% to 46.3% from 51.3% in the prior year. This decrease is also attributable to the low margin installation work and the costs associated with an international demonstration in the current quarter. Additionally, as previously mentioned, the 2010 gross margins contained a benefit of a $2 million revenue that only -- that related to a risk share payment for a demonstration performed in a prior period. Excluding this contingent payment and a low margin pass-through in 2011, margins for the first six months of 2010 and 2011 would have been 45.7% and 47.4%, respectively.

Base business within the FUEL CHEM segment continues to exceed 49.5% gross margins and is expected to remain in line with historical levels. APC segment revenue increased in the current quarter to $9.6 million, an increase of $353,000 or 3.8% over the prior year. For the first six months of 2011 APC segment revenue increased by $3.2 million or 18.5% to $20.7 million. This increase is due to the timing of progress work on current contracts. Our backlog of $15.3 million at the end of June is comprised of domestic backlog of $6.3 million and international backlog of $9 million which includes $5.5 million for China. A large portion of the current backlog is expected to be worked off during the remainder of 2011. Recent announcements in July have increased our backlog to more than $22 million. We expect to see near-term increases and order activity in the APC segment as air pollution control regs have been issued and are expected to be a driver of our NOx technologies and as our international business continues to expand.

Gross margins for the APC segment for the current quarter were 45.6% versus 34.9% in the prior year. Gross margin percentages for the first six months were 47.9% versus 35.4% in the prior year. Contributing to the higher gross margin was a more concentrated mix of higher-margin equipment projects, specifically SNCR projects. We expect the margins in this segment to remain strong for the remainder of the year.

On a consolidated basis gross margins increased 3% in the current quarter to 44.5% from 45.5% in the prior year. Consolidated gross margins for the six-month period increased by 3.4% to 47.1% from 43.7% in the prior year. Reasons for these variances have been previously discussed.

SG&A for the quarter ended June 30, 2011 and 2010 were consistent at $8 million. Although SG&A remains flat for the quarter versus the prior year, there are various decreases and employee-related costs of $408,000 and stock compensation expense of $134,000 which were partially offset by increases in fees to outside service providers, business taxes, bad debt expense and depreciation of $512,000.

SG&A for the six-month period ended June 30, 2011 to 2010 were $15.9 million and $15.5 million respectively. The increase of $419,000 or 3% was primarily related to increases in employee-related costs of $400,000, fees to outside service providers of $691,000 and business taxes, bad debt and other sales and office-related expenses of $177,000. This was offset by a decrease in stock compensation expense of $882,000.

Additionally we reversed the final portion of the contingent liability associated with the Advanced Combustion Technology's acquisition during the current quarter which amounted to $758,000. We will continue to monitor our SG&A spending and where needed take action to maintain reasonable spending levels.

Investment in research and development activity was almost double in the current quarter and the six-month period over the prior year. We continue to look for specific development opportunities within our existing portfolio products and will be opportunistic in identifying new development projects as our markets continue to develop.

Our tax rate for the remainder of 2011 is expected to be approximately 48% principally due to the significance of permanent items within our overall rate reconciliation. Any increase in operating profits above expected levels will dilute the permanent add-backs and reduce our overall rates.

Net income for the current quarter was $430,000 compared with a loss of $309,000 in the prior year. Our six-month net income has improved by $1.8 million over the prior year from a loss of $95,000 to income of $1.8 million. Included in our reported results for the three and six-month periods of 2011 are non-cash stock compensation charges of $1,600,000 and $1,200,000 respectively.

Our cash balance remains strong at $30.7 million and our working capital is $41.1 million which provides us with a unique opportunity to make investment decisions quickly.

Quarterly cash flow for the first six months totaled $921,000. Cash used in investing activities was related to the purchase of equipment for our FUEL CHEM demonstration and commercial programs. Cash used in financing activities is attributed to the exercise of stock options.

We're encouraged with our business prospects in the second half of 2011 and into 2012 due to the drivers of the regulation clarification and growth in our foreign markets.

Operator, if you could, please open the lines for questions.

(Operator Instructions) John Quealy, Canaccord Genuity.

Hi, good morning folks, first a question on the guidance in the release. When you referred to improved results 2011 versus 2010 does that refer to the full year or the full calendar years or both of those period, or does it mean the back half of '11 versus the back half of '10? If you could just provide what we're looking for there.

Sure, John, I will answer that. We're referring to the full-year, and as I've stated in prior calls, it's because of the regulatory environment change that was expected to be announced in July that we expected strong business activity in the APC business segment. And based on all reasonable expectations while we cannot quantify with precision what our recognized revenues are, the belief is that our full-year results will achieve a higher outcome than we did in 2010. And that pretty much I think the Company's belief is in line with the various estimates that analysts have made.

Okay. And then on CSAPR, I guess, a couple of things, one, still seems to be somewhat fluid on the NOx side of things and the time line there. So, Doug, if you can give us a little bit of your take on that. I know you talked about it a little bit, but it seems like it's more S02-centric than NOx right here, and at least that's what some folks are talking about from a utility perspective. And then also if you can comment on, there is say lot of analysis and speculation about how many sites and boilers we'll be taking off-line to avoid compliance. So if you could talk to us a little bit about total available markets of how many units you think we'll be taking out of service so that would not be a target for Fuel Tech.

Well, let me speak to the NOx market, our primary market. We're seeing a very tight timetable for implementation. That does not favor the SCR technologies that have a long lead time. There is lead time to get a low-NOx burner. So what that favors is the ability to quickly implement SNCR technology.

I would suggest that most of our expected business activity will be centered on the quick deployment of SNCR solutions. Particularly, there are states that have some very challenging overall emissions limits as well as time tables. So, the activity is strong there.

I think it remains to be seen what each utility company may do with respect to continued operation or closure. I don't have the numbers in my head, John, as to what I think I can say with certainty are the number of plants that we could potentially address. But when you look at the overall market, and certainly we're in a weak economic market to be sure that puts pressure on these operators. But as long as these compliance requirements are in place, their best solution, their most cost-effective and their quickest is to deploy our traditional technologies.

Okay, and then just maybe a last question on the model side. Dave, did you say SG&A, R&D is going to stay at these levels due to some increased investment on -- to technologies and some other things? Could you just recap for us what you think on the OpEx side?

Yes, for the R&D, we're expecting it to stay at this level as a real dollar amount. At SG&A, you are probably trending 36% or so for the rest of the year, so as a percentage of revenues consistent with where we have been.

Okay, that sounds good. Thanks, folks.

Jeremy Sussman, Brean Murray.

I appreciate the color on 2011. With CSAPR starting to take effect next year, any broad thoughts on initial 2012 guidance at this point?

Well, it would be premature to give any guidance for 2012, although I would suggest to you that with this regulatory environment framed, the APC market will continue to show good growth. We have contracts that range in size from maybe, low end might be $1 million, and we have contract bids out there that are many millions of dollars. So the decision to go forward with those to award those to Fuel Tech are elements of uncertainty.

But we could characterize the bidding activity, the request for quotation, the calls suggest to us that over the next 18 to 36 months there's going to be a lot of deployment activity to meet the CSAPR requirements. We're also getting inquiries about S02, SO3 mitigation, I should add. That may have been an element of John's question I may not have answered, because these SOX requirements are also very stringent and so we have been looking at what our FUEL CHEM technology can do and additional solutions to help the utilities comply with these requirements at the back end in a shorter period of time.

Great, I appreciate that. In regards to the recent new contract awards, about how much, just roughly speaking, was in the US -- this is on the APC side -- and how much was in China? And then, if you could just kind of expand on what you've seen in China over the last couple of months that has changed for the better, that would be awful.

I think Dave is going to answer that question for you.

US year-to-date, we're just shy of $14 million. China is about $5.3 million. And then going forward, we're expecting to see some continued orders coming out of China as well as some US orders coming through. So does that answer your question?

Yes it does, thank you.

Certainly, China is on the early edge of its 12th five-year plan implementation requirement. So we're anticipating quite an increase in workload over there and a very competitive environment as well. But it's a big market and we are doing all we can to position ourselves for capturing our fair share.

Dan Mannes, Avondale.

Good morning.

Good morning, Dan.

A follow-up question on CSAPR -- we've had some talks over the last several months. My impression was that you weren't anticipating a significant amount of activity out of CSAPR and were maybe more looking forward to the Transport 2, which was supposed to be announced in the latter part of this year. What changed about the final CSAPR that made it more viable for you and is incenting your clients to come to you a little bit more than maybe you would have thought?

Well, you know we knew the requirements for NOx reduction, if you think of it long-term, we were moving up from 2015 to 2014. We also knew and have stated that the regulatory clarity wouldn't come about until July 2011. One cannot have expected that the final proposed rule had embodiments that were different as proposed under the Clean Air Transport Rule.

But it from our point of view, I think the short time frame of requirements, the specific allocations to certain sources, the requirements on states for reductions over past achieved emission levels puts a very onerous burden on these states. And even though we didn't expect significant interstate trading, it's freely allowable. Old NOx allowances under CAIR are not usable, and the states that had these specific limits that if they are over their requirements, and then particularly a state like Texas, which is going to have a very, very difficult time to meet its NOx and S02 requirements, and I expect some appeals, by the way from states like Texas. Their only real answer is to turn to our traditional technologies in that time frame.

So that's why we're getting the calls. And it's just accelerated a little bit more into the third quarter than we probably would have thought under the Clean Air Transport Rule. Again, unlimited trading is allowed, but it means little if you're going to be penalized on two allowances for every ton of NOx that you're over your limit. So those penalties are severe.

So it's fair to say that maybe the rule came out more favorable than you were originally anticipating. The time frame hasn't really changed, the '12 and '14, but in other aspects, the rule's more favorable than you maybe originally would have anticipated.

It's more favorable to Fuel Tech. Certainly, if you're a facility, they would view it as less favorable.

Got it.

We're there to help them comply with an expedient, lower-cost solution.

And any regions -- I mean, you pointed to Texas, which I think everyone knows has a serious S02 problem -- but outside of Texas, any other states you would highlight as maybe being particularly impacted by the NOx rules?

Well, I would say that states with the largest shortfall in their 2012 emission budgets versus the 2010 emission levels are probably Louisiana, Ohio, Illinois, Florida. And that's for seasonal. And on the annual emissions levels, the states that probably have the largest shortfall in looking at the two-year comparison for annual NOx probably includes also Illinois, Kansas, Michigan, Nebraska, Pennsylvania and certainly Texas.

Got it. And then, one other quick question, you know you talk about your strong tax position and you at least, maybe not so far this year, but we would expect you'll be cash flow positive for the year. Any thoughts on putting some of that cash to work, whether given the current share price or alternatively we've seen some M&A in the group; are there any other technologies you might be on the lookout for?

Yes. I would characterize our initiative and effort around the following three objectives. You know that we've put a much more significant emphasis on new product development and R&D. That has been a very, very active area within the Company. So certainly being able to develop new products that exist within our traditional business segments or improved versions of those products is the area of high activity.

We have also been identifying what I would just call new markets, again, within those traditional business segments. For example, I mentioned earlier achieving S02 or SO3 mitigation. We're known as a NOx reduction company, but the customers that we serve also have these requirements are coming to us for solutions that can be as a result of our TIFI technology or as a result of other injection methods and solutions.

And then lastly, part of what I would like to see us achieve, and this is longer-term perhaps, but we believe there is opportunity for Fuel Tech to build a third business segment that capitalizes on our strengths and has some good strategic fit. But that may involve either an M&A initiative or applying resources to internally develop technologies that we can identify.

So they come in small, medium and large size scale investments, but we believe that our cash position is needed to achieve the highest return by looking at those kinds of opportunities.

Got it, thanks.

Rick Hoss, ROTH Capital.

Doug, on the ULTRAs sold in China, I'm assuming these are for SCRs, or I should say units with SCR.

Yes.

Okay. And then as far as trends that -- I know there's been a lot of discussion about the smaller, inefficient plants being scrapped and new builds -- SCR-equipped new builds in China. Does that trend -- is that still relevant, that trend? Are you still seeing that, or what is the dynamic over there right now?

Absolutely, I think there is still going to be a multi-year transformation of the electric generating infrastructure of China that is going to call for a continued phaseout of smaller, less efficient units in conjunction or addition to larger units.

You mentioned our ULTRA technology; that's selling very well over there, and I believe that we're in a great position to capitalize on that need. It's a way to play in the SCR market. It makes total sense for these key point regions, and I expect that will continue to be a growth business for Fuel Tech in China. Generally, China is an APC market for us. It's not really a FUEL CHEM market today, but we have prepared for that market with a full range of technologies.

So, these documents that have come out by the administrative environmental protection and the kind of thinking that has frameworked the 12th five-year plan will actually call for all of our technologies and various applications to come into play. ULTRA is just a particularly unique one that has -- its driver is safety and effective way to convert urea to ammonia, and that's why it just sells well without the 12th five-year plan regulatory drivers forcing it.

Can you give us an update on the municipal boiler opportunity that, I think you had discussed I don't know if it was a year ago or 18 months ago, but what has occurred with that and what is the outlook?

In China, or in any country?

In China.

Well, I think it remains an active market for Fuel Tech. It addresses a need to enable the country to comply with requirements that governs those generating units. And so I think the municipal market is still going to be an important part. I mean, obviously, our larger revenues will come from the larger utility markets, but certainly that will be part of our business activity.

The ASCR units that you have sold this year, what has been the size on a megawatt basis?

The ASCR?

Yes.

It's moderate in size. It's for a steel plant application, and that market is still yet to fully develop into the utility space. But it's a great demonstration project for the Company. We've put a lot into showing the validity of the technology. So while it is a medium to small sized unit compared to larger utility plants, the technology is scalable.

Are you competing with traditional SCR? Is your ASCR competing with traditional SCRs? And I realize it would be for larger coal-fired plant, but just as something that you're going (multiple speakers).

The very large plants that have been newly built that have SCR technologies, this is not a substitute for that. It's a way to take a layered approach combining these technologies, and it really depends upon the initial conditions of that plant and what the emissions limits are.

So, for example, if you're required to get a 90% reduction, say, from where you are, SCR is really the way to go. But we approach that with layered technologies. And so if you're trying to get to 200 milligrams per normal cubic meter which is outside of the key point regions and your starting point condition is 400, a 50% reduction is cost effectively achieved with combining some of our technologies. However, if you're at 800 and you're required to get to 100, that might require a different solution that we can't provide. So it really depends upon the existing and required conditions plant by plant.

Okay. And then on the FUEL CHEM side of things, the demo in China that was in the press release, that depressed second-quarter growth, is that back on? Is that a new one, or what -- can you give us more information?

No, that program was ended. It just didn't really quite achieve its expectations. The boiler was fairly clean to begin with and there was an aggressive effort to demonstrate the application. But the incremental achievement was modest. It probably didn't represent fairly the kind of problem that the FUEL CHEM business is geared to solve. And so we decided not to proceed further with that.

Okay, terrific, thanks.

Nevertheless, it's a good way to get your self into the market. And while in hindsight I think we would not have pursued that demonstration, it's part of the market development efforts that a company like Fuel Tech has to undertake in order to achieve understanding and recognition of what a new technology like FUEL CHEM to that market can offer.

That being said, you know there will be other applications in time where the FUEL CHEM technology will find a good application that is not regulatory-driven. And you also have to understand -- which is beyond the scope of this call -- the way the electricity markets work in China. They're different from the US, so the ROI drivers are not necessarily the same. That's why I've said that all along that I think China is really an APC market over the near-term for Fuel Tech. That could change in a couple of years, but -- and we'll be there to address that market, but for now, the ROI was simply not there on that particular project.

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

Hi, good morning everyone. I just wanted to get a little general color. You mentioned you're getting quite a few customer calls coming in. Can you just talk about maybe the type of clients that are calling -- are they more existing clients, new clients. Are these typically smaller, larger boilers, more power than industrial focused? Just a little bit of color around that, if you could.

Well, certainly, many of our existing customers are calling. There are new customers as well, but they all are now addressing a short-term schedule on multiple sites. And as an existing customer, they're pretty familiar with our technology. And so we can go right to commercial application.

We may provide a temporary demonstration capability simply to provide a fast rollout where they are needing it while awaiting permanent equipment deliveries. But we're seeing it from a broad mix of domestic US utilities, many of which who were already well familiar with Fuel Tech's capabilities.

Is there any discussions about additional alliance agreements or sort of framework agreements with a customer you rolled out across your fleet?

Not in the sense of having a long-term discussion about considering and developing a multi-year alliance agreement. It is more how fast can you help us address our need. So if you want to think about it, it's a pretty quick alliance to respond to that customer's needs on multiple sites to comply with this rule, but not the kind of formal alliance agreement that we announced in prior years.

Perfect, all right, great. Thank you very much.

At this time, I show that we have no further questions in queue. I would like to turn the call back over to Doug Bailey for any closing remarks.

Okay, well thank you, operator. Thanks, everybody, for your participation and your questions. I think Fuel Tech is where it expected to be, find itself this time of the year. We certainly, like many companies, have faced a difficult economic environment. Obviously, we all know that it's only been exacerbated by the debates in Washington that have taken place over the last number of weeks, and I don't know where the market will sit at the end of this week, quite honestly.

However, what we did expect was that there would be regulatory clarity. It's been much, much needed, much anticipated. In general, I think we conclude that these rules favor our business. I have confidence that our APC business activity will be very robust and strong. Some of these bookings that we expect in the second half of the year will turn into recognized revenues in 2011. Many of them will fall into 2012. But I guess I've never been more confident that our APC market domestically is facing a good wind to our back.

I've always believed that the China market will be a strong growth business in the APC sector for Fuel Tech. So, in combination, we're seeing improved opportunity in the domestic US and China. We're seeing a little bit new activity in Europe by those companies that have turned to biomass, and that finally favors some application of some FUEL CHEM technology, which you haven't had in Europe. Europe will still remain a smaller, slower-growing market. And I think FUEL CHEM, which has principally been a domestic US market, will continue to grow. It's challenged with the fact that the pressure to retire units or reduce load levels generates the attrition that offsets some of our actual true growth, which is our new contract wins.

But net-net, I think we're well-positioned to meet our plans for 2011 and show continued growth into 2012.

So look for the APC activity to drive most of our remainder year growth and, with that, we expect to turn in a respectable year-on-year result between 2011 and 2010.

So, with that, I thank everybody for the participation and your questions. If you have further inquiries, do not hesitate to contact us directly and we will be happy to share our conversations with you.

Thank you, operator, and thank you everybody for joining today's call.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.