Advanced Emissions Solutions, Inc.
Q4 2007 Earnings Call Transcript

Published: 12 Mar 2008

[Operator:]

Welcome to the ADA-ES fourth quarter and yearend 2007 financial results conference call. (Operator Instructions) This conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, which provides a Safe Harbor for such statements in certain circumstances. These statements are identified by pre-factory words such as believe, will, hope, expect, anticipate, intend and plan, negative expressions of these words, or words of similar meaning. The statements include ADA-ES's expectations regarding future revenues, expenses and other financial measures, the number and timing of anticipated bids, projects, and new contracts for activated carbon injection systems and other products and services, changes in DOE and utility funding for mercury control and other projects, likelihood of additional state, and more stringent Federal, mercury control and carbon reduction legislation and the impact of that legislation on ADA-ES's target markets, anticipated size of, and growth in, ADA-ES's target markets, expected shortage in activated carbon supply and ADA-ES's plans to address such shortage, costs of developing and building, and projected capacity, timing and financial impact of, an activated carbon manufacturing facility, availability of financing for such a facility on reasonable terms, ability to provide a long-term supply of activated carbon and to obtain contracts to sell any activated carbon produced at the facility, our plans to secure interim supplies, treatment and storage facilities for AC to supply customer needs pending the completion of this new facility, ability of ADA-ES's Refined Coal product to qualify for, and expected dollar value of, federal tax credits for that product, passage of appropriate clarifying legislation to define the parameters of such tax credits, availability of funding for carbon dioxide reduction research and development projects, ADA-ES's ability to manage internal growth, as well as other similar items. Such statements involve significant risks and uncertainties. Actual events or results could differ materially from those discussed in the forward-looking statements as a result of various factors including, but not limited to

[Mark McKinnies:]

Good morning, everyone, and thank you for joining us for the ADA-ES fourth quarter and yearend 2007 conference call. First, I'd like to discuss the company's (Technical Difficulty)

[Operator:]

Excuse me. Mr. McKinnies?

[Mark McKinnies:]

Yes.

[Operator:]

I'm so sorry to interrupt you. Could you please pick up your handset? The audience cannot hear you.

[Mark McKinnies:]

I am on my handset, not on the speakerphone.

[Operator:]

Okay. Is there a way to turn your volume up?

[Mark McKinnies:]

There it's up all the way.

[Operator:]

Okay.

[Mark McKinnies:]

Okay. Is that better? Excuse me for not being loud enough there. I'm going to continue on. We also incurred $397,000 in net cost related to our Refined Coal efforts and in the joint venture with NexGen during the year. The joint venture succeeds in obtaining approval for the anticipated Section 45 credits. NexGen has the right to maintain its 50% interest by paying ADA additional $4 million in eight quarterly payments of $500,000 each beginning [when] qualification for the tax credit. On a net income basis, we broke even in the fourth quarter compared net income of $223,000 or $0.04 per diluted share for the same period in 2006. For the year, our net income was $247,000 or $0.05 per diluted share as compared to $377,000 or $0.07 per diluted share in 2006. Cash flow provided by operations was $882,000 for the quarter compared to $110,000 for the same period in 2006. For the year, operating cash flow of amounted to $2.1 million as compared to $1.8 million for 2006. Our balance sheet as of December 31, 2007 has been strong working capital of $14.1 million. Other investments and marketable securities (Technical Difficulty). We have no long-term debt and shareholders equities totaled over $28 million. We have sufficient resources on hand to continue to aggressively pursue the rapidly growing mercury emission control market. Our plans for the anticipated future need for expanded activated carbon production require additional funding that Mike will discuss. In summary, the company continues to achieve attractive revenue growth and generate (Technical Difficulty) Now, I would like to the turn the call to Mike.

[Mike Durham:]

Thank you, Mark. 2007 was a very exiting year for the company as we achieved near-term growth as reflected by a 24% increase in revenues for the year, and made significant progress on our long-term growth strategy in supplying activated carbon to our customers in the power industry. I'd like to bring you up to-date on the current status of our aggressive business strategy and provide you with milestones to look for over the next several months that will reflect our increasing success of our business plan. Some investors have expressed concern that the coal-fired power industry has been under increased scrutiny of environmental issues this past year, especially related to the impact the carbon-dioxide emissions on climate change, resulting in the rejection of a number of permits for new coal-fired plants. However, we expect this adversarial climate to increase the market for ADA's products and services. Let me explain, our business plan is based upon providing technologies for the existing 1100 fleet of coal-fired boilers that produce 325 gigawatts of electricity, roughly 50% of the US demand. The best estimates of the energy experts indicated need of an additional 300 gigawatts to 500 gigawatts of new capacity in the next 25 years to 30 years. With new portfolio of standards for increased use of renewal energy sources and requirements for reduction of greenhouse gases limiting new coal-fired plants, dependence on the existing fleets for baseline power, increases. To continue operating, even as environmental regulations become more stringent, these older plants will require the use of retrofit technologies to address conventional pollutants such as SOx, NOx and particulates, and for the first time pollutant, such as mercury and carbon dioxide. Therefore, the current trend towards clean energy creates a growing market for ADA's existing and developing innovative technologies. I will now move on to the regulatory market drivers that create demand for our mercury control equipment, chemicals and services. The regulatory issues surrounding mercury control have created confusion for the investment community, because of the complicated (inaudible) of state regulation, separate rules for new plants and the constant flux with the Federal Regulation. Although straightforward Federal Regulation driven market may make the investment decision more clear, the complexity of the current requirements has actually been a strategic advantage for ADA. Unlike other suppliers, who have activated carbon and mercury control technology, ADA has been extensively involved in the policy process at the state and national level for the past eight years, and we have intimate connections with the coal-fired power customers, gained through 30 years of serving this market. This inside knowledge has allowed to us to accurately predict that this market was going to develop and make early decisions to position the company to take advantage of these events. A good example of this is the recent ruling by the DC Circuit Court that EPA erred in its process that resulted in a relatively linear Clean Air Mercury Rule or CAMR. The court's ruling invalidates CAMR and remands the matter back to EPA for further proceedings. CAMR, which is promulgated in the spring of 2005, created very little market for activated injection technology. However, we predicted that CAMR would not stand up to judicial review and continued with plans to respond to the current mercury market from state regulations in a (inaudible) and a larger market that is likely to be created by strict federal mercury control rule, which we believe will be enacted in the next year or two. These plans involve constructing a new large LAC production facility to be operational in early 2010. In addition to this first production line, we're permitting five identical lines with three sites in Louisiana and North Dakota. Each production line is designed to produce up to 175 million pounds AC per year, for a total annual production capacity from all six lines in excess of 1 billion pounds per year. This capacity would help meet the expected needs of multi coal-fired of our power plants that could result from a stricter federal mercury rule control regulation. With the Circuit Court ruling, it appears that our expansion plans are now more likely to pay off for both the company and our customers. For the long-term viability of mercury control, it's even more promising with the court's ruling, but what impact will this have in the near-term markets for the equipment in AC. The supply commercial systems for activated carb injection, is our fastest growing area and was our dominant revenue source in 2007. We expect that this will also be true in 2008, based upon bidding proposal activity. For example, in the fourth quarter 2007 alone, ADA responded to 19 requests from customers for ACI system quotes. Most of the near term market for ACI equipment is based on existing regulations in a dozen states and strict limitations on new power plants. These rules remain in force and will not be impacted by vacating the federal rule. However, in spite of this, we are seeing some delays in the decision making process on mercury control as a result of the ruling. The general consensus from customers is they believe that a new federal rule will obviously be stricter and require additional equipment in AC. For example, CAMR required less than 20% reduction in some cases and utilities could avoid doing anything by buying credits, whereas the new rule is expected to require up to 90% reduction with no trading allowed. This has created a need for them to assess the impact across their entire fleet. As a result, some contracts that were expected to be awarded in February have been postponed and we have been asked to extend the period for our bids to be valid. We should have a better feel for the impact of this on the timing of new contracts for equipment after a 45 day review period by the Department of Justice. The majority of the near term market for activated carbon is also based on firm regulations that are already in place and not impacted by the CAMR ruling. In fact, if we looked at the AC market, just for the 80 ACI contracts that have already been awarded and these equipments are being fabricated and installed, we estimate that they will require over 200 million pounds of AC per year and as much as 150 million pound of AC to be delivered in 2009. Since this early demand occurs prior to the planned startup of our first production line, we have developed an interim supply plan to sell into this market. In January, we announced our plan for producing our near-term supply of high-quality AC by purchasing raw activated carbon material from foreign producers, and then melting, chemically treating, packaging and delivering a high quality product to the utility customers. To accomplish this, we relied heavily on the expertise and experience of two recent additions to the company, John Rectenwald and Steve Young, who have a combined 60 years of senior level experience in production of AC. As a result of this effort, we produced our first batches of AC in January, and in February completed the first performance tests of the product at a power plant burning Western PRB coal. By injecting ADA's AC at a very competitive feed rate, we are able to reduce mercury emissions by greater than 90%. The Western coal application for this first test is chosen because the majority of the early market for mercury control is for plants that burn Western Coals. To control mercury for these plants, it is necessary to use the higher-priced chemically-treated AC. This was an important milestone for the company because we now have our product to sell to customers. Our interim supply plan creates greater potential for AC revenues in 2008 and 2009, and would enable us to compete for contracts that require AC supply prior to the 2010 startup of our plan new production line. We intend to put together facilities and sourcing contracts, so that by the end of 2008 we can supply up to 10 million pounds per year and increase the capacity to 30 million to 50 million pounds per year by the end of 2009. We are evaluating different options to purchase or lease facilities to process the AC with capital expenditures expected to be less than $2 million. Due to high cost of foreign carbons and transportation expenses, this business section is expected to operate at approximately 20% gross margins. Once the new plant becomes operational, we expect the margins for our AC will increase to 60% or higher. In addition to progress on the interim supply, we've been making great strides towards the design, permitting and financing of a new AC production facility. Early raises of capital in 2004 and 2005 provided ADA the resources to move forward at an accelerated pace to be able to lay the groundwork for commencing production, synchronized with the growth of those markets. In August, we announced the filing of an air permit application with the Louisiana Department of Environmental Quality to build what would be the world's largest AC production facility. In September, we filed an air permit application for a similar facility with the North Dakota Department of Health. We plan to file a third permit for another similar facility in North Dakota in the near future. The permits could only be filed following a two-year effort to identify potential sites, test various feedstock materials, reserve lignite sources, secure property for the plants, designing the plants, and perform engineering environmental assessments. These permits which require beginning construction of the new plant, each cover two production lines capable of producing outputs of 350 million pounds of AC per year. That's per site. Our draft permit was released by the Louisiana DEQ in early December and was open for 45 day public comment period. The DEQ received comments related to the specifics of the air pollution control equipment selected for the products. We've been informed by DEQ that DEQ address these issues and is submitting the permit with no changes to EPA for their approval. If there are no additional comments from the EPA, we expect that final permit to be issued in the first half of 2008. To keep an aggressive schedule to bring new production online in a timely manner that coincides with expanding mercury control market, we've engaged an engineering, procurement and construction company, continue the plant design process and address critical path issues. We are also on the process of purchasing long lead time equipment for the plant. The company is also making progress on securing the financing that will be necessary to complete the project. In this regard, in August, we engaged Credit Suisse as our financial advisor for the project. The estimated all end project cost for the first production line is expected to be approximately $300 million. We are currently planning to secure 60% of the financing or $180 million through debt. We are working to secure the senior project debt with off-take contracts for the AC that we will be providing through both the interim supply and new production. The process of selling preproduction capacity is a common procedure in the power and coal markets. To secure the project debt, we'll need to put in place long-term off-take contracts for AC that will have a total contract value of approximately $250 million. We expect to accomplish this with two or three contracts. The nature of the contracts must cover the time period of the debt and be in a secured take or pay form that is bankable. To ensure the contracts meet these needs for project financing, we are negotiating contract terms that are expected to provide revenues through at least 2016 with some bids going out to 2021. We are coordinating the development of the terms of the contracts with Credit Suisse who are placing their debt for the project. In addition to the debt financing, we anticipate sourcing 40% of the funding or $120 million through equity. Our financing plan is based on splitting this into $60 million at the ADA corporate level and $60 million at the project level. For the corporate equity, we'll have to supplement our developmental expenditures to-date and the $14 million in working capital we have on our balance sheet from previous financing and ongoing cash flows of our business. We intend to raise a supplemental corporate equity through the sale of up to 3 million shares of ADA-ES common stock that was approved by shareholders last year. Although this may result in a substantial dilution of our stock, it will help fund the capital project that we expect to increase our revenues by greater than 500% in less than two years. The second $60 million of equity is expected to be raised through an investment by a strategic partner and at the project level. In January, we announced that we had completed the first phase of the selection process for a strategic equity partner and received indicative bids from a number of substantial financial strategic firms, with significant experience in the energy sector. All of these strategic equity candidates are well capitalized and have significant plant operational experience and demonstrate success at developing large projects. We have narrowed the group of interested candidates, begun negotiating final terms on our definitive participation agreement that we are working towards signing in April. We believe this strategic partner will provide us the additional equity financing we need, expertise on developing projects of this magnitude, and access to the resources to move forward, not only, on this first production line, but potentially in all six production lines that we are permitting. As we progress over the next few months on financing this project, we will keep the public informed through press releases of significant milestones. Because of the magnitude of these events, they will obviously be material to ADA, and will be made public, once the contracts and definitive agreements are finalized and signed. Therefore, as an investor, you should look for the following key announcements. Off-take contracts from utilities for AC, identification of a strategic partner and details of their equity investment. Release of the final permit for the first production line and key equipment purchase commitments. These announcements will document the accomplishments of steps needed to secure the debt financing and begin construction. Changing topics let me update you on the status for our other near-term growth opportunity, which involves producing and refining coal product. Our JV with NexGen Resources, Clean Coal Solutions intends to produce a product that we expect to qualify for the IRS section 45 tax credits, processing coal to reduce emissions of nitrogen oxides and mercury. Last year, we conducted two additional full scale tests of our product, which we call CyClean, which demonstrated the ability to meet the emission control performance required to qualify for these tax credits. CyClean is based on ADA-ES' patented chemical developed for sliding boilers, burning western coals, combined with our expertise in sorbent-based mercury control technology. One key challenge for this business is the need to obtain legislative clarification of the current tax credit requirement for 50% increase in "market value", of the refined coal; because market value for coal is not a well defined concept, this provision makes it difficult for the technology supplier and the IRS to determine how to interpret and enforce this rule. We have made good progress working with Congress and the correction we needed to address this problem was included in the final market of the Senate Energy bill. However, the Senate was unable to get the required 60 votes and the tax title is dropped from the energy bill passed last fall. We're still working to get this correction in the energy tax bill the Congress will work on this year, driven by the need for extension of the tax credits for renewable energy. Without this correction and the fear that the coal prices continue to rise, this business line will be limited to the profits based on just the chemical sales, and no tax credits. In addition to our key growth areas, mercury control and refined coal, we continue to demonstrate our position as a premier developer in innovative clean energy technologies. Control the carbon dioxide from coal-fired power plants is currently a hot topic in Washington and a significant issue for the coal industry. ADA sees this as an opportunity, and we have begun working in this area to develop technologies to help our customers with this issue. Our approach to developing CO2 capture technologies is build around the business model we developed for the mercury control market. We are designing technology for existing plants, rather than just new ones, and we are pursuing technologies built around key extendable chemical that could produce a long-term revenue string for ADA-ES. Since the current market for CO2 is some years in the future, although Washington appears ready to accelerate the schedule. We intend to primarily use external funding from DOE and utilities to support R&D activities in this pre-market period. To date, we've already been successful obtaining initial funding from DOE and the utility for testing and scale-up of sorbent-based CO2 capture. We are currently in the process of developing R&D funding proposals for multi million dollar projects. We are also pursuing additional areas around carbon management for coal-fired plants, with an intention to providing multiple technologies to address the need for our customers, through reduction of carbon generation, carbon capture and beneficial use of the carbon. In summary, we continue to advance our business strategy to provide environmental technologies and specialty chemicals to the power industry. We are very enthusiastic about our rapidly growing commercial market for mercury control technology. We are implementing significant enhancement and adding resources in depth, as we shift our mercury control business and research and development demonstration, to supplying commercial equipment and furthering plans to manufacturing key chemicals. These changes reflect our response to realization of the mercury control market, and should allow us to benefit from the extensive efforts that we've made over the past five years to help create this market. We can now shift the efforts of our effective R&D team to developing new technologies, processes and commercial business concepts to address the huge opportunity that awaits us in climate change in carbon management. We are confident in our position and firmly believe that our aggressive strategy will take ADA-ES to a new level. I'd now like to open up the call to questions.

[Operator:]

(Operator Instructions). The first question comes from Sanjay Shrestha with Lazard Capital Management.

[Graham Mattison:]

Hi. Good morning, guys. It's Graham Mattison. How are you?

[Mike Durham:]

Good, Graham.

[Graham Mattison:]

Just a quick question, I apologize, I couldn't hear at the beginning of the call. You were mentioning something about the margin trends in the mercury control division. It was down from the prior quarters. Is this a reflection of increasing competition or is this more of a normalized level now that the markets move more into commercial sales and away from demonstration units?

[Mark McKinnies:]

It's really a matter of two factors. One is the increased amount of those revenues that are coming from ACI system sales. Those system sales very lower margins than the mix of revenues that have been in that segment or been primarily dominated by the DOE and industry of contract revenues, which had higher revenues. So, as the ACI systems continue to grow as representing a larger part of that segment's profits, we'll see that margins continue to decrease there too. Our expectation on those ACI system sales was to have gross margins in 20% to 25% range and we believe those are competitive amounts.

[Graham Mattison:]

All right, great. Thank you. Now that the camera has been thrown out, what are you seeing or hearing on the policy front, your expectations? Do you think you will see more movement on the state level or will it be everyone waiting for a federal ruling before moving on the state level?

[Mike Durham:]

It really depends on what happens here. The Department of Justice has 45 days, which I think ends in the middle of March in which to more or less provide EPA with guidance on what the rule means. And so, then it's a matter of what EPA decides to do and whether they do something in the late hours of this administration or leave it to the next administration to do will determine whether the states move forward. So, in some cases there are state actions that will kick in automatically. For example, in Wisconsin there was a rule that was more aggressive, but they had a provision that if the federal rule was weaker they would fall back to the weaker rule. And so, now they could be back to a stricter rule. But I think what we're seeing right now is just beyond the 12 states that are there, the rules for existing power plants, everybody else just wants to see what comes out of EPA in the next month or so.

[Graham Mattison:]

All right. And then, given some of the uncertainties, is it reasonable to think you'd probably see about the same amount of awards in 2008 as 2007?

[Mike Durham:]

We think so. Again, most of these are for rules that are already in place. So it's really more of a timing issue, some that we had expected should have been awarded in February that we've been asked to extend the bid for another 30 to 60 days. So it will just push it out a couple of months.

[Graham Mattison:]

Great. But it's still the long term market status?

[Mike Durham:]

Absolutely.

[Graham Mattison:]

All right. Great. I will jump back in queue. Thank you very much.

[Operator:]

Our next question comes from Jason Simon with JMP Securities.

[Jason Simon:]

Hi, Mike. Just a follow-up to the last question with respect to the 45-day review period and just to get some clarification on when. I guess you would expect some anecdotal evidence on which way the EPA would move, understandable they have a decision to make on their own. But maybe you could give us some clarity as to what the Carper Bill is all about, and whether or not that would actually force a decision by, say, October?

[Mike Durham:]

Well, Jason, that kind of talks about the two parallel paths in which legislation could come, and that is either through EPA or due to legislation. And one of the issues that EPA has to face is the way the ruling read, it was forced to back into a section that will require MACT regulation. And the MACT regulation is a pretty onerous restriction because it doesn't allow any flexibility in how it's applied. So in the past both the environmentalist and the industry recognized that the answer might be in a little more flexible rule. So, that kind of encourages everybody to try to work through legislation. So, what you're seeing in Congress is two different directions, and actually both are coming around Senator Carper, who is on the Environment and Public Works Committee. He's got a 90% rule that they were trying to attach to the Warner Lieberman CO2 bill. And it was taken out in the committee with a thought that maybe it will be added ones that bill goes to the full senate floor. In parallel, Senator Carper has also introduced a bill to force EPA to come up with a 90% rule by October. So, it's just more or less to force them and I don't know how much progress that's moving forward. But in general, there are a number of different directions of which [abstract] mercury rule could come out. We don't know whether it comes through legislation, whether it comes through EPA, and whether it will happen in this administration or the next. So, we'll just have to wait and see on that. And we kind of look at that as, that is a matter of when we look to turn on that second through the sixth line, production line and time those capital expenditures for that market or the first production line is pretty much based on rules that are already in place.

[Jason Simon:]

Okay. And with respect to, I guess your estimate on what the market should like in 2010, which is I guess what you'd suggest it is over 200 million pounds. Could you, perhaps just go through what states those would be, what consent decrees and I guess what your expectations would be for, when you would think you would be able to secure some off-take contracts for your debt financing?

[Mark McKinnies:]

Well, that 200 million pounds was really just a number for the first 80 contracts for ACI equipment, when we look we expect another 70 or so to be sold just based on state rules in the next year and half, but we really look at that 2010 market is still being around that 300 million to 400 million pound range.

[Jason Simon:]

Okay.

[Mark McKinnies:]

And we are seeing some additional market. We're starting to see our first Canadian RFPs out for carbon. Their needs are late 2010, so instead of this market shrinking, we're seeing a number of things. EPA recently announced that they are looking at requiring the 100 summit plans, which are very large facility going to need significant amount of carbon are possibly coming out with the regulation September for those. So, all the dynamics are, this is a very firm market, its only going to grow. So, what we're seeing on these off-take contracts is really, we are running several parallel activities that we all expect to come together in time to finance this plant and get it started in early summer's break ground. And so what we're looking how the permits coming in time for that, the strategic partner coming in time on that, the off-take contracts to support the debt, all within that timeframe. That's what we're hoping that all comes together. And if that happens, then we are going to producing in early 2010.

[Jason Simon:]

Okay. And why the variability and I guess the number that's being thrown around with respect to what the potential size of the market looks like in '010, I mean some people are saying a couple hundred million, obviously with the number of units that you think have the potential to be installed another 70, you're saying it could be 300 million units to 400 million units. What is the variability do you believe and what people's assumptions are?

[Mark McKinnies:]

Well, on some of that there are state rules. And so in lot of the state rules there are options of burning high sulfur coal and if they're going to scrub those units and put SCRs, we don't look at that as much of a market. So it really depends on some uncertainties and exactly what the utilities are going to do, what rules will specifically be in place, what kind of performance they are getting. We're estimating on the low-end of things. So, we're very comfortable of the range being in the above 300 million pounds. We can go through and look at what the utilities are bidding, asking for that that kind of works out that. We don't see that as having a lot of uncertainty. I mean its sound like a lot 300 million to 400 million, but its just part of until they place orders. That's the reality.

[Jason Simon:]

Okay. I guess the last question, just some clarification. You had suggested that the market in 2009 would be over 150 million pounds, is that what I heard correctly?

[Mark McKinnies:]

Yeah. We think when we look at what rules are in place the number of new plants that are coming online between now and then, say the Illinois rule the requires plants to be injecting activated carbon by the middle of 2009. When we add those up on a plant-by-plant basis, it comes to 150 million pounds.

[Jason Simon:]

Okay. Sorry a follow-up. What sum do you see coming out of Texas right now with respect to consent decrees and I guess timing on activated carbon used on there?

[Mark McKinnies:]

That's going to depend some utility decisions that they're looking at addressing once they get a little more clarity in the next few weeks.

[Jason Simon:]

Okay. Thanks very much.

[Mark McKinnies:]

Okay, Jason.

[Operator:]

Your next question comes from Brian Shore with Avondale Partners.

[Brian Shore:]

Good morning, gentlemen. Just a quick question initially about your near-term sourcing efforts. Can you talk a little bit about availability as carbon coming from China impacts from coal shortages over there as well as your competitors Calagon already sourcing a good deal as carbon from there. What's the availability looking like?

[Mike Durham:]

Well, it's the numbers that we're trying to put together the 10 million by the end of this year and 30 to 50 by the end of next year, is a challenge, because it's not readily available. It's a whole bunch of relatively small supplier. There is pressure on coal as you see feeding China's need for power and steel, those are obviously a much bigger priority than activated carbon. And also, we have some pretty specific requirements for the quality of that carbon and that takes a quality of the coal. So what we're doing, we're coordinating with production in China. We've got people heading over to China very soon, so we can look at the facilities, look at the coal, characteristics to make sure it can meet our quality needs. So, it's going to be a challenge get that much supply, especially being able to provide 30 million to 50 million pounds by the end of 2009.

[Brian Shore:]

All right. And then sort of getting back to the recently remanded CAMR, I guess. I think you said in your prepared comments that you've seen some systems get pushed back as people would like to see some clarity there. Are you also seeing, in your talks for supply agreements, of activated carbon? Are you seeing some delays and some hesitation there on the parts of utilities to see what federal rule looks like?

[Mark McKinnies:]

Its less delays and hesitation than it is, that when every time you have uncertainty come into an industry, that they have all gone through a process of looking out, because these are the rules, here is CAMR, who has a state rules, less layout of plan. The plan involves buying this many systems there are many with much activated carbon and all of a sudden now the rules change. So, rather than continue on that, lets call a time out here, lets look at what the new rule might be. Does it makes sense, what we're doing, if we are going to need to get a higher level of removal that we're going to get to need more mercury. What should we be doing? So, it's more the uncertainty of it and just wanting to take a time out for this DoJ review and to see what the EPA says on the other end of this.

[Brian Shore:]

Sure. And the timeout is that being taken by state or by utilities in states or with regulations already or is that more.

[Mark McKinnies:]

No it's kind of there's two parts to it and so in some cases, do they have a state regulation then they know what they have to do in that state, unless it's a very weak state regulation, that they think now that the EPA rule could be even stronger. So, Wisconsin might be an example of that. So they just want to make sure that whatever they are going to purchase, fits into a plan that now meets the new scenario. Okay.

[Brian Shore:]

And then one question, Calgon announced last week that they had secured a contract with the utility and I think this is the first probably announced deal to date. I know you guys had worked with them in the past, is this one that you are more involved with in the bidding process?

[Mark McKinnies:]

This was submitted under our joint agreement with Calgon.

[Brian Shore:]

Okay. Can you shed any sort of insight there on what sort of impact that may have in terms of revenues?

[Mark McKinnies:]

What we had announced in the past, our relationship was a commission based structure at that time; we are getting confirmation on exactly where we stand on that, we will be giving further guidance on that. But it would be based on future sales and the timing of those revenues. Okay.

[Brian Shore:]

Okay. Great, thank you guys very much for your [call].

[Mark McKinnies:]

Okay.

[Operator:]

Your next question comes from Bill Burns with Johnson Rice.

[Bill Burns:]

Hey guys. You mentioned having a definitive agreement with a strategic partner signed next month, and then when you listed your key items to watch out for, you listed having off-take contract first. You think having that contract in place will have to come first?

[Mike Durham:]

There are two parallel efforts. Obviously the strategic partner wants to see that this is going to be a financeable plan, and a utility is that is looking that signing up an off-take contract once to make sure we have the financial resource until the plan.

[Bill Burns:]

They all kind of come together at once.

[Mike Durham:]

Yeah, well everybody is under confidentiality agreements. So both parties are aware of the progress on the other sides of these transactions.

[Bill Burns:]

And then a follow-up on cement. I have seen an awful lot of news come across my desk about mercury emissions at cement factories. Do you have any working relationships with any company?

[Mike Durham:]

We have done some work in the past with the Portland Cement Association. But most of the marketing to the individual plants will end up being new customers for us, if that happens. The good news is, like the power industry, that there is not thousands and thousands of potential customers here. If you look at it, it’s a 100 cement plants and there is a lot of consolidation in the industry, maybe that's 10 potential corporate entities we would have to deal with. But we would be starting with a little bit reputation, but not near the inroads we have in the coal-fired power industry.

[Bill Burns:]

Would it be correct to say though, or imply that, I think it could actually make the decision a little bit quicker than say a utility company?

[Mike Durham:]

They are both not known for rapid decision making.

[Bill Burns:]

Thanks, guys.

[Operator:]

Our next question comes from [Louis Arroar], a private investor

[Louis Arroar:]

Can you clarify the section 45 thing more than you did in your notes?

[Mark McKinnies:]

Well, this issue in the requirement, it was written very specifically that the contract has to show an increase in the market value of 50%, an increase of 50% of market value and nobody in the coal industry knows what the concept market value means. And so, it needs some clarification and it'll have to be done either at IRS level, it's better to be done to go back to the people who wrote the legislation to clarify that. The correction that we have gotten approval from the Senate side on was that rather than talk about market value, it was to say that the market value provision will be deemed to have been met if you have even greater increases in emissions than the 20% that was required. So it's at a higher level. I think it was 20% for NOx and 60% for mercury. And if you achieve that that would be considered of meeting that market value it has. So that's the kind of correction we were hoping for without -- and only Congress can change the rules that drastically, otherwise, IRS is going to have to try to figure out what that means.

[Louis Arroar:]

Other question I have, you say you have people on their way to China to start working with them?

[Mark McKinnies:]

Relative to the sourcing that we are doing for the material that we would be processing in the US, yes.

[Louis Arroar:]

Okay. Thanks.

[Operator:]

Your next question comes from Mark Segal with Canaccord Adams.

[Mark Segal:]

Yes. Hi, guys. Most of my questions have been answered, just one quick question for you. Going back to the industry dynamics that you cited the difficulty in securing interim supply of activated carbon, what is your confidence level in hitting that 10 million pound threshold for this year and 30 to 50 next year? And what would the timeframe look like? When you need to start to, I guess, get a sense of the securities of those agreements to meet any commitments in 2008.

[Mark McKinnies:]

Well, we're in the process of putting that together as we speak, I mean the fact that we've already been able to secure some produce and process it and test it, shows you how quickly we're moving. But let me clarify, the 10 million pound capacity is how much we will be able to produce on an annual basis by the end of the year. So, we're not saying that we're going to scale up to have revenue from 10 million pounds this year. Our plan is to put those facilities in place that, by the third quarter we're selling product and hope to have a capacity that that product is available at 10 million pound per year. So in other words, less than 1 million pound per month capacity. And then, through 2009, ramping that up from the 10 to the 30 to 50, so, by the end of the year, we have a capability of providing up to 30 million to 50 million pounds or say, 3 million to 4 million pounds per month at that time, but again, not selling 30 to 50 million pounds in that year.

[Mark Segal:]

Okay. Thanks very much.

[Operator:]

(Operator Instructions). Your next question comes from the (inaudible), a private investor.

[Unidentified Analyst:]

Hi, Mark and Mike, how are you doing?

[Mark McKinnies:]

Good.

[Unidentified Analyst:]

I wanted to follow-up just a little bit, in the past you've talked on the Clean Coal about the IRS letter ruling or whatever in it, it almost sounded like until your last comment that that was not one of the options left. It sounded like if Congress doesn't act, you have no chance for getting tax credits, is the letter ruling still a possibility?

[Mark McKinnies:]

It's still a possibility. While I was going through Congress, the IRS said they were not going to address it. We're seeing some change from the IRS. The private letter rulings from the earlier Section 29 experience were problematic. They felt like they were -- the IRS looked bad by giving out those private letter rulings and now they're back tracking a little bit that they feel that they might do that if we don't get the clarification from Congress. So it's possible. It's just some uncertainty there, but the window is open for those.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

Your next question comes from (inaudible).

[Unidentified Analyst:]

Hi, good morning. I was calling to find out if the EPA ozone ruling that EPA will be putting out maybe sometime today, will that have any effect on your business?

[Mark McKinnies:]

That's primarily going to be a SOx and NOx issue.

[Unidentified Analyst:]

Okay.

[Mark McKinnies:]

We do a little bit around NOx, but our big revenue source is really around right now mercury and CO2 in the future, so that won't have much impact on us.

[Unidentified Analyst:]

Okay. Thanks.

[Operator:]

There are no further questions at this time. I'll now turn the conference back to management.

[Mark McKinnies:]

Well, again, thank you for your interest in the Company. We've got a pretty aggressive schedule. There is going to be some milestones that are going to be happening over the next several months, if completed will show the progress we're making towards getting this financing for this, and construction for this and this is going to be a major event for the Company. So we will keep you informed as these contracts get completed and they are signed and we will announce and file these. So, again, thanks for your interest and keep an eye on the Company over the next several months.

[Operator:]

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.