Arq, Inc. (ARQ) Q4 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to ADA-ES Reports Fourth Quarter and Full Year 2012 Financial Results. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Thomas Mei of The Equity Group. Thank you. Mr. Mei, you may begin.

Good morning, everyone. This conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and 27A of the Securities Act of 1933, which provide a Safe Harbor for such statements in certain circumstances. These statements are identified by words such as believe, will, hope, expect, anticipate, intend and plan, the negative expressions of these words or words of similar meaning. Actual events or results could differ materially from those discussed in the forward-looking statements as a result of various factors, including factors discussed in ADA-ES filings with the U.S. Securities and Exchange Commission, with particular emphasis on the section entitled Risk Factors in ADA-ES's Form 10-K. Listeners are cautioned not to place undue reliance on the forward-looking statement and to carefully examine the information ADA-ES discloses publicly in its filings with the Securities and Exchange Commission or otherwise before deciding to invest in ADA-ES securities. The forward-looking statements made during this conference call are presented as of today's date, and ADA-ES disclaims any duty to update them unless otherwise required by law to do so. A recording of this call can be found in the Investor Resources section of our website, www.adaes.com. Now I would like to turn the call over to Graham Mattison, Vice President of Investor Relations of ADA-ES.

Good morning, everyone, and thank you for joining us for the ADA Fourth Quarter and Year End Conference Call. Earlier this morning we issued our earnings release and also slides related to our prepared comments. A copy of the release and the slides are available on the Investor section of our website at adaes.com. Joining us from ADA-ES are Mark McKinnies, Senior Vice President and CFO, who will discuss our 2012 performance and financial results; and Dr. Michael Durham, President and CEO, who will provide an update on the recent corporate developments and our future plans. We will then open up the call for questions, and the operator will explain the process for asking questions at that time. Before I turn the call over, I need to note that our discussion today will include non-GAAP financial measures, all of which are reconciled with GAAP numbers in the exhibits accompanying our press release. In addition, some of our comments will include forward-looking statements. Please keep in mind, actual results could differ materially from those projected in any of our forward-looking statements. With that, I will turn it over to Mark.

Thanks, Graham, and good morning, everyone. Beginning with Slide #3, we provide some of the 2012 highlights including the finalization of the Mercury and Air Toxics Standard, or MATS rule, leasing 2 additional refined coal RC facilities that generated 16.4 million in RC tax credits for ADA that can be used to offset future taxes; the BCSI asset acquisition made in the third quarter of 2012 to expand our capabilities in the emission control market; fleet-wide award for both Activated Carbon Injection, ACI, and Dry Sorbent Injection, DSI, systems; and continued work on our CO2 capture contract. Turning to Slide 4, we highlight our RC results, which primarily consist of the consolidation of Clean Coal Solutions, LLC, or Clean Coal, our joint venture with NexGen Resources and an affiliate of the Goldman Sachs Group. During 2012, we had 8 facilities producing RC, 4 of which were leased to third-party RC investors and 4 of which were retained and operated by Clean Coal for its own account. Those operated by Clean Coal generated tax credits, which will be used to offset future tax expense. As stated in prior calls, when Clean Coal operates an RC facility for its own use, it records the purchase and sale of coal at approximately $20 to $40 per ton, incurs operating expenses of approximately $3 per ton for the coal treated and generates approximately $7.50 per ton in tax benefits. When an RC facility is leased or sold to an investor, Clean Coal recognizes ongoing rental revenues and receives ongoing payments from the RC investor but does not incur the coal purchase cost or sales revenues or the related operating costs. In the fourth quarter, the 8 operating RC facilities produced a total of 4.6 million tons, up from 1.1 million tons in the fourth quarter of 2011. Of these tons, 2.5 million were produced at RC facilities leased to RC investors, with 2.1 million tons produced in RC facilities that were retained and operated by Clean Coal, generating tax credits for its owners. The total RC revenues in the fourth quarter were $61.2 million, consisting of $9.8 million in revenues from leasing the 4 facilities and $51.4 million related to the resale of coal for RC facilities operated by Clean Coal. Fourth quarter 2012 GAAP gross measure -- the gross margin, excuse me, for the RC was $3.2 million or 5% of RC revenues compared to $4.1 million and 20% in the fourth quarter of 2011, reflecting the higher tonnage accreted by the RC facilities that was retained -- that were retained by Clean Coal. Adjusted RC gross margin, which excludes the coal sales, raw coal purchases and the retained tonnage operating expenses was $9.7 million or 98% of the RC revenues adjusted for the coal sales. Mike will provide further details on the outlook for RC and our other segments later in the call. Turning to Slide 5, we highlight our emission control activities, which provide equipment, chemicals and services to help our customers meet existing and upcoming emission regulations. Since the Federal MATS rule was finalized in April of 2012, we've been responding to an increase in procurement activities for both our ACI and DSI systems. EC revenues in the fourth quarter of 2012 were $4.4 million, up 40% from the same period in 2011 due primarily to the increased equipment and consulting revenues as the power industry is reacting to the finalization of that MATS rule. EC gross margins were 25% in the quarter, a substantial improvement from the fourth quarter of 2011, which was impacted by work we performed for Clean Coal that was eliminated when we consolidated our results. As of December 31, 2012, we had contracts and progress for work related to our EC segment totaling approximately $25.3 million, up from only $736,000 as of December 31, 2011. We have active bids out for over $125 million for ACI systems and over $160 million for DSI systems. Turning to Slide #6, we highlight our CO2 capture segment that represents the DOE and industry-supported development and demonstration contracts. Revenues in the fourth quarter of 2012 increased 55% to $1.9 million for the quarter due to the timing of scheduled activities. We have remaining amounts under DOE contracts, including anticipated cost share portion in progress, totaling approximately $12.7 million as of December 31, 2012, and we expect to recognize approximately $9.7 million of that from these contracts in 2013 and the balance in 2014. Turning to Slide #7, which provides a summary of our consolidated financial performance in 2012, you'll see there that revenues amounted to $67.4 million for the fourth quarter or 174% more than in 2011 and $212.5 million for the year 2012 as compared to $53.3 million in 2011. The increases for the quarter and the year are primarily due to increases in our RC activities as previously discussed. General and administrative expenses amounted to $7.3 million in the fourth quarter of 2012 as compared to $2.9 million in the fourth quarter last year. The increase from last year is due to amounts incurred by BCSI subsequent to that acquisition, higher amounts from Clean Coal and overall increases in overhead due to increases in our staff and expansion of our corporate facilities. For the year, G&A expenses increased by 15% to $20.2 million as compared to $17.5 million in 2011 for the same reasons. Research and development expenses amounted to $904,000 for the fourth quarter of 2012 as compared to $893,000 in 2011, with the increase primarily due to more activity in our internal development projects. For the year, our R&D expenses increased to nearly $3 million as compared to $2.3 million in 2011 for the same reasons. For 2012, we recorded an operating loss of $8.4 million as compared to an operating income of $3 million in 2011. The 2012 loss is due largely to costs incurred in operating those RC facilities for our own account, where our share of the tax credits earned was more than $16.4 million, as was noted in that Slide 4 we talked about above. The tax credit from these credits is not reported on the face of the -- tax benefit from these credits is not reported on the face of the financials as we're presently providing a valuation allowance for all of our tax items. Below the operating line, we are reporting several items, which include income of $360,000 for the quarter and $760,000 for the year from our net equity in the net income from unconsolidated entities, which amounts are primarily due to our equity in Clean Coal Solutions Services, LLC, the company that we formed to oversee the routine operations of the RC facilities. Included in the interest and other income is interest expense of $416,000 for the quarter and $1.5 million for 2012, for the year, related to Clean Coal's line of credit and interest expense on the deferred gain for income tax purposes related to the Clean Coal lease transactions. An expense of $748,000 and $2.3 million for the quarter and year, respectively, related to ongoing royalties in the settlement of the Norit arbitration that occurred in 2011. Also shown below the income tax expense benefit line is a subtraction of nearly $2 million for the year for the noncontrolling interest in the income of Clean Coal for the year that is not attributable to ADA. For the fourth quarter, our net loss was $5.4 million or $0.54 per diluted share as compared to a net income of $17.2 million or $1.90 per diluted share for 2011. For the year, our net loss was $13.1 million or $1.31 per diluted share as compared to a net loss of $22.8 million or $2.85 per diluted share for 2011. Cash flow provided by operations was $925,000 for the fourth quarter in 2012 compared to $13.7 million for the same period in 2011. For the 2012 fiscal year, cash flow used in operations was $5 million as compared to cash flow used in operations of $8 million in 2011. Our balance sheet at December 31, 2012, reports cash and cash equivalents of $9.7 million and a working capital deficit of $25.7 million, which includes as liabilities deposits and deferred revenues totaling approximately $28 million. Both the deposits and the deferred revenues represent cash that we received that we generally expect to recognize as revenues in the future, but such amounts impact the overall working capital. Cash inflows from the recently-announced RC investment and lease amendments have significantly improved our cash and working capital since December 31. Long-term liabilities totaled $6.5 million and total equity, including the reclassified temporary equity, totaled approximately $20 million at year-end. Mike will discuss the status and progress on several opportunities we are pursuing, and I'd like to turn the call over to him.

Thank you, Mark. Let me start by discussing our specific business segments, beginning with our commercial and Emissions Control technologies. The Mercury and Air Toxics Standard, or MATS, was made final last April, which requires over 1,200 existing and new coal power plants to reduce emissions of mercury and other hazardous air pollutants by April of 2015. MATS is creating a significant market for the low CapEx technologies that ADA provides. Our Dry Sorbent Injection Systems, or DSI, reduce acid gases, and we are offering several different low-cost mercury control technologies capable of achieving the MATS mercury limit. We're expecting MATS to generate a market opportunity in excess of $1 billion for ACI and DSI systems, and we hope to maintain a combined market share of 35%. This would generate over $300 million in revenues for ADA over the next 3 years. I'd like to refer to Slides 10 and 11 to show that MATS is creating a significant increase in ACI and DSI procurement activities, point out that ADA is very active in response to this market. In the past 6 months, ADA has announced awards for DSI and ACI systems with a potential total value of over $50 million. These wins include a fleet-wide contract for ACI systems from one utility and a fleet-wide contract for DSI systems for another. Last week, we announced the contracts by ACI and DSI systems to a large air pollution control company or a power company. Of the dozen or so companies bidding on either ACI systems or DSI systems, we believe we are one of only 2 that can provide both components. We feel that this is a strategic advantage because when these 2 pieces of equipment are used at a plant, they must work together efficiently in order to achieve MATS compliance. And earlier this week, we announced the award of 10 ACI systems from 3 different utilities. In addition to these awards, ADA has active bids on over $125 million for ACI systems and over $160 million for DSI systems. We expect there's another $600 million equipment opportunities that will come up for bid in the next year or so. Following this $1 billion equipment market, we anticipate a $1 billion to $2 billion annual market will develop for chemicals needed to capture mercury on a continuous basis. ADA will compete in this market with our Enhanced Coal technology. We believe this technology provides a benefit to customers of $1 to $4 per ton of coal burned when used on Western coals, by eliminating or minimizing the amount of activated carbon needed to achieve compliance and reducing its negative impact on fly ash sales. U.S. power plants consume up to 600 million tons of Western coal per year. One of the advantages of our technology is that it does not use bromine. The power industry is beginning to experience and report corrosion issues in their plants, and they attribute -- that they attribute to the addition of bromine used to enhance the capture of mercury. Thus, we found the industry open to considering a new technology, such as our Enhanced Coal, which avoids what could be a very expensive plant repair associated with the use of competing products. We provide Enhanced Coal through 2 channels. We have licensed the technology to Arch Coal to apply it to its PRB coals at the Arch mines, resulting in lower mercury emissions. We are also applying it at individual plants that source their coal from multiple providers. This year, we're applying several demonstrations of the technology, both at the mine and the specific power plants. As well, we were recently awarded the first of what we believe a family of patents designed to protect our technology both in the U.S. and abroad. In addition to ACI, DSI enhanced coal, ADA also provides options for reducing mercury emissions with other coal treatment technologies. Clean Coal Solutions markets 3 different technologies: CyClean, M-45 and M-45-PC, all of which can reduce emissions of NOx and mercury and qualify for IRS Section 45 credit for the next 9 years currently at $6.47 per ton of RC. The JV has 28 qualified facilities available to produce RC and generate tax credits until 2019 for the first 2 facilities and 2021 for the 26 newer facilities. Although we made progress with new RC facilities in the first half of 2012, closings of additional deals with power companies and investment partners for RC facilities were delayed in the second half of the year for various reasons, including permitting, regulatory approval, corporate financial restructuring of related third parties, change in plant ownership, changes in and retirement of personnel involved in the negotiations and uncertainties in the tax credit community. While these matters will continue to stretch out the time needed for some of the facilities to become fully operational in possibly sometime in 2014, I'm happy to announce that since January, we are seeing progress on a couple of key issues that is results -- resulting in increased activities on closing, including 1 completed transaction and the potential for 2 more in the next month or so. I will refer to Slide 5 -- 12 to discuss this progress. In January, the IRS began to provide feedback to the tax credit community related to structures of transactions of financial investment and businesses that generate tax credits. This information has come from communications related to audits of previously generated RC tax credits, meetings with key law firms that consult for business-reliant tax credits and with refined coal technology companies and the restart of issuance of private letter rulings, or PLRs. We understand the IRS is also considering publishing a Revenue Procedure, which will provide Safe Harbor guidance. The results of this progress can be seen in our recent announcement of the closing of an RC facility with a new RC investor and this week's announcement that we have restructured agreements on 2 of our longest-running RC facilities with an affiliate of Goldman Sachs. Recall that in December of 2012, we announced the Clean Coal and the GS affiliate amended the initial agreements for these 2 facilities to month-to-month, while we awaited clarity from the IRS. We also expect that we will amend other existing agreements with Goldman affiliates to provide for similar terms. This should also allow us to close another transaction with them in the next few weeks. Once completed, it would represent the second of 2 RC units converted from operations by Clean Coal to generate tax credits for its own use to operations by an RC investor. As we've stated in the past, this represents a change from an annual expense for the joint venture of approximately 3 million -- $3 per ton of RC to a profit to the JV of $3.50 to $4 per ton of RC. Since these 2 units are capable of producing a combined 7.5 million tons of RC, this will have a significant impact on our income statement. In addition, the cash provided at closing in the form of prepayments will improve our liquidity. I'd like to use Slide 13 to demonstrate the timing of when you'd expect to see the impact of closing these 2 transactions. When the second facility closes, these 2 new deals will have generated a total of $28 million in upfront payments through the joint venture. However, the full impact on earnings will not be seen until the second quarter. Since both of these units will have been operated by the JV for the majority of the first quarter, this will result in only approximately $1.6 million in net earnings benefits compared to fourth quarter results. However, starting in the second quarter, these 2 facilities will begin producing an approximate $6.6 million earnings benefit, a swing of more than $12 million from the fourth quarter of 2012. Now let me refer to Slide 14 to provide you a status update of the 28 facilities. I find it easiest to discuss these in 3 groups. With the next expected closing, 6 of the first group of 8 units will be operated by third-party investors. We expect these 6 units will be producing approximately 21 million tons per year of refined coal, which are expected to generate over $75 million in revenues based on historic use of coal at plants where they're sited. We will continue to operate 2 smaller of the 8 first units that are expected to generate approximately $3 million per year in tax credits for ADA. The second group of 8 consists of CyClean units that we plan to use the power plants with cyclone boilers. These facilities are in various stages of progress towards full-time operation, with the first one expected to close in the next 2 months, once the PLR is obtained and the PUC approves the transaction. A few more in this group are expected to close later in this year, while some are not expected to close until sometime in 2014, as utilities owning these plants are going through financial restructuring. The third group consists of 12 facilities that were originally planned for use on smaller plants with cyclone and circulating fluid bed boilers. However, last November, we announced the breakthrough that ADA's newest RC technology, M-45-PC, had achieved qualifying emissions for pulverized or PC boilers. This greatly expands the potential market for the remaining RC facilities to include many larger power plants. The use of RC -- of the M-45-PC technology would allow these facilities to operate at their full capacity and each produce 5 to 10 million tons of RC per year. Clean Coal have received very favorable feedback from initial marketing of the technology, and we have 4 test programs scheduled over the next 2 months. We expect the initial facilities using M-45-PC could be operating as early as the second half of this year. In addition to providing Emission Control technologies for these new regulations, we also continue to develop new technologies to address future challenges for the coal-fired power generation industry. We're continuing to move forward on a $20 million program, according to the development of our regenerable solid sorbent technology to capture carbon dioxide in coal-fired power plants and industrial sources. We've initiated the fabrication construction of a 1 megawatt pilot plant being installed at the Southern Company's subsidiary, Alabama Power Plant Miller. Southern Company is co-funding the project with other participants. We are also evaluating alternate applications for the carbon capture technology that could have market potential ahead of regulations on power plants, such as enhanced oil recovery and treatment of landfill gas. So in conclusion, we are beginning to see very good progress in our 2 major business areas, refined coal and Emissions Control, as we focus on executing on opportunities that we expect will create significant revenue growth and cash flows for the company over the next 3 years. We are positioning ourselves for continued long-term success and are developing technologies for future markets. Operator, we can now turn the call over for questions.

[Operator Instructions] Our first question comes from the line of Ben Kallo with Robert W. Baird. Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division: I know you went over this on Slide 13, but can you just give us kind of a rough estimate of what your cash will be ending this quarter Q1?

Yes. Ben, I don't think I have it. Some of that is going to depend on these other activities at Clean Coal where we're -- have demonstrations planned for at least the PC technologies, so we're advancing on that. But we would expect that -- to improve over what was shown at the year end. Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division: Okay. But you have a 20 million inflow right now, right?

That inflow came to the joint venture, and so there was -- most of that was -- some of that was used to repay the existing credit lines there. And these deposit amounts -- some deposit amounts that were -- Goldman Sachs had made, their affiliate had made for reserving a couple of units that we also had repaid to them. So that was taking care of some liabilities for those impacts, and the working capital was kind of 0 on those as current liability amounts. And -- but there will be an improvement in the first quarter over what was shown at year end. Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division: Great. And then have you guys changed your method of installing, running the units before you get everything lined up as far as monetization goes? Or are you guys still -- are you going to start running units before you get all those reductions there [ph] ?

Our intention is that every unit we are moving forward on is one that will have a third-party investor because we're well ahead on the tax credit. So we won't be moving forward on anyone that we intend to keep ourselves over the next year or so. But that being said, we're finding that maybe the fastest way to get these going is to go ahead and do the documents ourselves and get that negotiated with the utilities so that the third-party investor could then step into that deal. So what you may see is that on some of these, we may operate them for a month or so, once we got that transaction in and we're finalizing with RC, but they will not be done with the intent to keep them in the long run. Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then as far as your market share, you always mentioned around 30% -- 30%, 35% market share for the ACI units and DSI units. Can you kind of give us an update, because you've had several wins here, on where you see that right now and maybe who are your biggest competitors -- are the same people that we saw before when there were state regulations?

Well, the hard part is to document the market share because there's no denominator out there. There's no information. In the state program, we were kind of all working together to provide information through, for example, the industry clean air companies, to support the market activity because as they were looking at the federal regulation, that became a critical item of whether there was commercial mercury control technology. That is not occurring now. So we don't have a good number on wins or losses. All we know are what our bidding activity is and what we expect from what we're seeing. And so that's why we're just reporting on a basis of what we've won, what we've bid, what we still expect to be out there. Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division: Now you brought up the topic about bromine being corrosive. Now that seems to go against you guys selling ACI units. Can you just rectify that for me?

Well, not necessarily because we are seeing alternatives. The ACI is always going to be the standard backup. So even when we're selling our Enhanced Coal, we see that as being very complementary to the ACI, that they'll want the ACI equipment, but we're providing an alternative to that. So the ACI is a standard. The use of bromine in there is starting to experience some problems, and having a competitor, something that competes with bromine, we think is going to be very favorable but is not expected to impact our ACI sales.

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

A couple of questions. First, a follow-up on what Ben asked. So how do we think about actually your cash balance not so much by the end of each given quarter but by the end of this year? What should that cash position be?

We -- Sanjay, we would expect to see it growing significantly. Now that -- what was causing a use of the cash over this last year was that as we were operating these facilities, that some larger ones for our own account, we had those continuing operating costs. Now the announcements here at the end of February or beginning of March where we brought in an RC investor on that one significant facility and the expectation for the other one that we're operating is also a large facility here in the very near future. We'll defray those costs, and as Mike has pointed out and we point out in the slides, there is that significant turn that happens with coal going from -- costing us roughly $3 million or $3 per ton to generating $3.50 to $4 million in revenues per ton. And that's at the joint venture level. So those cash flows come into the joint venture, and I know it's their plan other than the internal use in -- where we've got some use needed to be putting the remaining 20 facilities into operation here, so there's some use for those, and that would be the primary use of the cash flows there. But as Mike pointed out, those will all be in anticipation of having an RC investor there that we can turn those into revenue generation fairly quickly. But besides that, the cash will be there accumulating and being distributed to the owners of the joint venture. So we expect it to be increasing throughout the year significantly.

Got it. So a follow-up then, guys. So one of the things I just wanted to confirm here, right, given a lot of moving parts, at the end of the day, so a cash -- that we still got to model the P&L on a short-term basis. So just to be clear now so you're going to have a big flip from loss to profit in Q2. And when we think about sort of the operating profit and the EPS in 2014, even if you don't let's say close any other facilities, we can just use that number in Q2, annualize that plus the 4 that's already been monetized with the RC investor -- is really how we should thinking about the operating profit for ADA after sort of subtracting out the equity contribution of joint venture, right?

Well, we think that, that certainly provides a base. We're expecting to add further facilities throughout the year, so -- but certainly, if the additional RC investment that we're expecting here to occur soon, if that would occur at the very beginning of the quarter, then you would -- it would -- you would look at the second quarter results, and those would provide a base for the balance of the year, on which we would expect though to grow. Now in addition to the RC amounts, we're seeing growth in the emission control revenues, as well as we've indicated this very significant increase in our backlog there. And those will be -- as we complete on those contracts, we'll see additional significant improvement in revenues in that segment as well.

Yes. That was actually going to be my follow-up question, but 2 more questions, guys, if I may. So one, right, with this seems like more clarity from the IRS and new investor coming into the mix. So when you look at like the folks that you are now having discussions with the RC monetization, right, from the investor standpoint. How much of that pool has grown and given the diversity away from some of the folks you've just worked in the past, right? So one, if you can talk about that as to how much you estimated things simpler relatively for speaking for the monetizer to come in and say, "It makes sense. I can move forward now." And then I have one more follow-up after that.

Well, Sanjay, I don't think it's created anybody new, but it -- the interest has gone from warm to hot. So it's people that were on the sidelines with a lot of interest. They told us they wanted to monetize some of the financial investor in the deal. And now that the clarity is coming out, that's going to increase the likelihood that those people will now come to the table with acceptable structures.

And therefore, your comments about a bunch of things happening in the second quarter et cetera, right?

Exactly.

Okay. So one final question then, guys. So on the emission controls side given this $25 million in backlog and what seems to be a very strong obviously bidding activity, how should we model that business? I mean, previously we're sort of thinking $50 million a year at least what looks like with that bidding activity, that number probably could be bigger than that, if margin is slightly higher than what, quite candidly, I would have thought at 25% directed to some licensing and all that. How should we be modeling that business for '13 and '14?

Well, Sanjay, that will continue to report backlog in -- on revenues there. What we've found is that we can't control the timing of the awards by the utilities. They are on their own schedule in that -- those procurement activities. So our -- although we -- as Mike has pointed out, we believe in our expectation is to maintain this overall market share of about 1/3 there going out, and we have an idea and believe that we can reasonably project the overall market there. The timing is still somewhat unknown. So the best indication of that will be as we talk about the backlog, and you'll see the revenue numbers there. From a margin standpoint, that we expect gross margins in the EC segment to run between this 20% and 25% level and to continue on there, there's serious competition out there as we come to the table with 2 or 3 other people that are competing very hard in this market as well. So the margins are -- we'd like to see them higher, but this is what this industry does when they're out in the procurement. They work those things down. So we're expecting that 20%, 25% margin going forward for the EC segment.

Our next question comes from the line of Steve Shaw with Sidoti & Company. Steve Shaw - Sidoti & Company, LLC: Can you provide some color on what you said for coal purchasing in the coming year and how it might affect the gross margin?

As Mark said, that's a huge denominator, and that's why we're trying to provide some reporting of non-GAAP, just so you can subtract that out. So that'll always be an issue whenever we self-monetize. But for example, as we've moved 2 of these units from operating ourselves and they were 7.5 million, say, in tons a year and look at paying an average cost of $30 to $40 a ton, that's a huge number in coal sales. Well, after the first quarter, we won't have those sales anymore. So that's the reason we think we will -- we need to report the non-GAAP just to pull that out of there because there you'll see the huge number of coal sales in the first quarter that goes away in the second quarter. We may run a couple new units for a month or so in the next quarter and also -- and it comes on again. So it just becomes a meaningless number to look at from a GAAP perspective. So it's just one of the characteristics of these self-monetizing in which we're operating them ourselves and picking on a $3 expense to turn that into a $7.50 impact benefit. But it carries with it this really high cost, the revenue of the sales coal and the cost of the buying of the coal.

[Operator Instructions] Our next question is coming from the line of Kevin McKenna with Stifel.

A couple of things. First just to kind of clear up on the cash and cash flow, when you put in the first unit, you start at 0, and when you're doing it for your own account, it's negative. Well, once you get up to 21 million tons, it's a lot easier to run something for your own account? Isn't that right?

Yes, certainly the case, Kevin, is that it's not soaking up precious cash resources there is that -- and that we have, then, cash coming in from the ones that are leased and are easily able to operate the ones that -- for our own account. The ones that we intend to operate and are planned, apart from this putting them into a leasing structure where we might do that for a month or 2, those are relatively small and then probably around 1 million tons for 2013, a couple of the smaller plants. And those are ones that we would expect to retain through the year for our own account. The larger facilities are really the ones that we're focused on in our recent sales transactions where there might be some operation here for a month or 2 as Mike's pointed out when we get operating permits and other matters done ahead of an RC investor coming into the transaction.

And from Slide 14, you have 8 units in full time operation. The 8 facilities that you have committed, are those all cyclones? Or are some of those the circulating fluidized bed boilers?

Two of them are CFBs.

Okay. So 6 and 2. And then the final 12, are those all pulverized coal boilers?

Well, we'll find out here. That's our goal because they're much larger. We're going through testing as I mentioned. We've got 4 tests scheduled over the next couple of months, and the purpose of those tests are -- we've already proven that the technology works. The next key step in bringing technology to the power industry is make sure they don't do anything bad. So we'll be testing them at different power plants with different characteristics and evaluating that, and if they're successful, I would hope that all of them would be on these boilers.

Okay. And then, I guess, my questioning on that was the guidance that you've given in the past for segment income would have to come up significantly if you're able to put these into PC boilers. Have you included anything in guidance for PC boilers before?

No, we haven't, and so you're right. The total -- the numbers we have produced before were based on about at 16 million tons for all 28 units, of which the last 12 would have been more like 1 million tons apiece. So now we're looking at potential for that to be higher. But the other dynamic is we also don't have a firm grip on what the final chemical cost will be. So we think it may be a little bit higher, but the volumes will be a little higher, and so after these next forecasts and additional work, we'll have a better feel on how much additional money we expect from all 28 units with the higher volumes we're expecting from the PC units.

And just the last thing is not having to commit those last 12 units to 1-million-ton facilities, you should have much higher cash flow from the cyclone boiler business, is that correct? Or better stated, the larger cyclones create better margins than the smaller cyclones.

Oh, absolutely. There is the cost of the chemical, and obviously, all the economics are proportional to the amount of RC produced. But there is a fixed element of it, and that's it takes about the same number of people to operate these whether it's a 5 million ton per year power plant or a 1 million ton per year power plant. So the larger units have better economics than the smaller ones.

So then just to summarize, if this is successful in pulverized coal, the margins would come up -- for the cyclones, would come up for the total as well. And I guess, one last question, could we expect margins and revenues to be in the range of what they were for the circulating fluidized bed boiler agreement that you just had?

That's going to depend on what we find out about the final chemical costs. That could swing it.

Our next question comes from the line of Ryan Alstead with RBC Wealth Management.

Just curious to know your outlook on the regulatory environment for the coal industry.

Well, the -- we feel that the math is it's pretty solid. In fact, you're seeing it in the response that the rule passed April, and already, we think about 40% of the business to meet MATS has already been let out for bid. So everybody is moving forward on that. I think the general feeling, it was reasonable. EPA has made one correction to the MATS rule that we are totally in support of, and that's a increase in the limit for new power plants. So that we thought the mercury level they had achieved -- that they had originally set in the rule was just not achievable, and therefore it was preventing new power plants from being built. And so we worked to get that changed, and our understanding is EPA has sent that to the White House, and it should be released here in the next few weeks. So the only correction that we've seen to MATS has been something that we think is kind of positive. So we think that is all very, very solid. The next regulation coming out will be the CSAPR or whatever the new name for the cross-states rule is. But that is probably another 3 to 4 years out. So that is actually also kind of good news for us because that was going to lead to a lot of scrubbers, and those scrubbers are very expensive, and that might have led to some shutdowns. So a number of plants that were anticipating shutdown because of that rule are going to continue to operate through 2018 or so.

Our next question is a follow-up from Kevin McKenna with Stifel.

Just one quick question. On the changes in regulations, do you expect that, that will favor the subbituminous coal, the Western coals that you work with versus the Eastern coals?

For a number of reasons, the Western coals have mercury that we think is easier to capture. On the -- the acid gases, they have significantly lower chlorine levels and sulfur levels that lead to sulfuric acid and hydrochloric acid, be easier to achieve. And they're also cheaper to mine, and so they can compete better now that coal is in international marketing. So as we look at what's happening in the coal industry, we see plants that burn the Eastern coals more at risk than those that burn the Western coals.

There are no further questions at this time. I would now like to turn the floor back over to management for closing remarks.

I would just like to thank everyone for joining us today and your continued interest and investment in ADA.