Good morning, my name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Advanced Emissions Solutions Q1 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Ryan Coleman, Investor Relations, you may begin your conference.

Thank you, Lisa. Good morning, everyone, and thank you for joining us today for our first quarter 2017 earnings results call. With me on the call today are Heath Sampson, President and Chief Executive Officer; as well as Greg Marken, Chief Accounting Officer. This conference call is being webcast live within the Investor's section of our website. A webcast replay will also be available on our site, and you can contact the Alpha IR Group for Investor Relations support at 312-445-2870. Let me remind you that presentation and remarks made today include forward-looking statements as defined in Section 21E of the Securities Exchange Act. These statements are based on information currently available to us and involve risks and uncertainties that could cause actual future results, performance and business prospects and opportunities to differ materially from those expressed and/or implied by these statements. These risks and uncertainties include, but are not limited to, those factors identified on Slide 2 of today's slide presentation in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, and other filings with the Securities and Exchange Commission. Except as expressly required by the securities laws, the Company undertakes no obligation to update those factors or any other forward-looking statements to reflect future events, developments or change in circumstances or for any other reason. In addition, it’s very important to review the presentation and today's remarks in conjunction with the Form 10-Q and the GAAP references in the financial statements. So with that, I'd like to turn the call over to Heath Sampson. Heath?

Thanks, Ryan, and thanks to everyone for joining us this morning. Let's start on Slide 3, as I like to provide a review of our strong start to the New Year. Our first quarter results serve as affirmation that our transform business model is working. Refined Coal or RC distributions from Tinuum remain strong and as projected. Tinuum was able to close another RC facility in late March with an existing tax equity investor. In addition to strong distribution from Tinuum, the quarter was also highlighted by the continued validation of our chemical's offering in the EC business. We again reduced our indirect operating cost by 43% year-over-year, and we drove nearly $9 million of net income during the period. Our cash position increased substantially from last quarter, up $15.2 million, and we fully expect to be a generator of strong free cash flow for the foreseeable future. As a result of our strong results and our updated projected future cash flows of $275 million to $300 million by the end of 2021, we have also announced new plans of $10 million tender offer of our stock today. I'll outline the specifics of this stock buyback later in the call. But when coupled with our expected $0.25 per share quarterly dividend, this forms the foundation of a balanced approach to capital allocation. I'm thrilled with the hard work of our team and eager to build on this solid start in 2017. So let's talk a little more specifically about our high-level results. RC distributions from Tinuum were strong and in line with our expectations at $14.7 million. This was a $9.8 million increase over the $4.9 million we received in the first quarter of 2016. Also, as mentioned, we were able to lease an additional facility to an existing tax…

Thank you, Heath. Let's start on Slide 6 to review our first quarter financial results. Let's begin with total revenue, which was $7.4 million for the first quarter. This was down from $22.4 million from one-year ago, primarily as a result of lower equipment sales, which was expected. As a reminder, current revenue from equipment sales is being recognized from previous equipment sales contracts using the completed contract method. Looking forward, the second quarter will likely see over $20 million in revenue recognized from these legacy equipment contracts and then we expect equipment revenue to taper off materially through the middle of 2018. As Heath mentioned, chemical revenues came in at $2.3 million, which was larger than originally expected. It is worth mentioning, our margins on those chemical sales came in slightly lower than we previously projected, due to ongoing field testing of these technologies with one large customer as well as higher-than-expected cost of customer acquisition. Despite this, we fully expect to return to 30% to 40% margins in the next few months. And while the chemicals market is a highly competitive environment, our pipeline remain strong, our offering is superior, and as important, it is very cost effective. As Heath mentioned, earnings from equity method investments, which generally represent our RC distributions, were up over 145% to $13.8 million. We had $1.7 million of royalties earned from our RC intellectual property, which was up nearly 50% as newly leased facilities in 2016 had royalty streams attached. Moving on to expenses. Our total operating expenses, exclusive of cost of sales, were $5.2 million for the first quarter. This figure was down significantly from $8.4 million in the first quarter of last year and is approaching the $13 million to $15 million run rate that we set as our targeted…

Thanks, Greg. I'd like to take a moment to review our go-forward strategy for next year in each of our business segments. First, let's address our RC segment. Slide 10 provides reminder of the facilities Tinuum has in place and those that are waiting tax equity investors. The slide has been updated for the new leased facility in March, and thus, Tinuum now has 14 leased facilities that have the potential to provide volumes of $40 million to $50 million tons per year of refined coal. Of the 14 non-operating facilities, some are already installed and awaiting investor, while others are yet to be installed. The challenge is not finding power utilities. The challenge centers on finding tax equity investors. If we can help Tinuum find investors for these 14 facilities, we have the ability to roughly double Tinuum's production to a $100 million tons per year. Slide 11 provides you with our traditional quarter-by-quarter review of Tinuum's operating volumes. As a reminder, the 14 facility was leased in March. So we'd expect to see an uptick in tonnage to process next period. Overall, you can see solid consistency in terms of performance, which is reassuring as this throughput supports our future cash projections. Slide 12 shows you a royalty versus non-royalty schedule in terms of production facilities. The bar on Q1 shows you that the number of royalty-bearing facilities do not change quarter-on-quarter. However, the new facility Tinuum leased in March is royalty bearing and replaces a smaller royalty-bearing unit at another generator. That generator was serving two units with one RC facility. However, the royalty-bearing unit is no longer running. Moving forward, we expect most of the non-leased facilities to be royalty bearing if and when they are leased by a tax equity investor. Let's pivot to the…

[Operator Instructions] Our first question comes from the line of Amit Dayal from Rodman & Renshaw. Your line is open.

Thank you. Good morning, guys.

Good morning.

Just talking about the chemical sales, it looks like the numbers have come in slightly stronger than what we had anticipated. Do you think you guys are in a position to maintain sequential growth on this front going forward?

Yes. Since we have such small percentage of the market right now, our expectation is to get to that 20%, 40%. So the timing of these next two quarters could be lumpy, because of our starting from such a small base. But based on what we have been doing, based on success of our demonstrations, we do expect to continue to grow to get to that 20% to 40%. What happens in each quarter is a little bit lumpy. I won't get too specific on what that number is going to be each quarter, but you should expect an increase and progression towards that market share that we talked about.

And in regards to the equipment sales backlog, if you will, or revenue recognition remaining, can you give us a number on how much is now pending that needs to be recognized or deployed?

Well, our backlog is in our Q – in our 10-K, sorry. So that backlog that we disclosed in our 10-K is the majority of that, and we don't have that in front of us. But if you look at it, the majority of that is going to runoff this year with the bulk of it, as Greg talked about, to be about $20 million or so in this quarter. Then we probably have another...

Pretty immaterial amounts coming through in the second half of 2017 with very immaterial amounts going into 2018.

Understood. And then on the RC front, you closed one transaction maybe a month ago, I guess. Do we expect any other deals to potentially come through before the end of the second quarter? Or should we look for any developments later in the year on this front?

Yes. So consistent with what I've said before, predicting RC closures within a quarter time frame, I stay away from. We have a lot that's going on and lot of discussions. So we feel good about stuff closing this year in 2017 and over the next several quarters. So we'll just update you as they come through and close.

Understood. And then just maybe jumping back to the chemical sales margins side, you said margins were a little over this quarter. Could you give us some color on where margins...

So the reason for – as we are demonstrating and moving to having a more commercial contract, it's costing us more than we thought to get through these demonstrations improve our technology. So those costs are affecting our margin. As we get up and running with these specific customers that we have, then it would normalize those costs would obviously be not there anymore because the customer would be acquired. And that's why we expect it to normalize back to our 30% to 40% expected margin.

Okay. Understood. And then on the M&A side, my last question. Are you focusing on the consumable market? Are you looking at something else to maybe diversify the portfolio offerings? Any color on where the focus is?

Yes. So it's both. It is broad for many reasons to ensure that we're opportunistic, but there is advantages for juridification. There is also advantageous for being close to our current technology. So we are evaluating both. And that's where we are in the process of doing. Again, we'll stick to that criteria that we've laid out, and be patient with it, so both on it.

All right. Thank you, guys. That’s all I have.

Thanks for the questions.

Our next question comes from the line of Patrick Wolff, Grandmaster Capital. Your line is open.

Hi, thank you. I'm a new investor. And first of all, I want to congratulate you guys. You obviously have been doing a terrific job and just well done. And I'm sure you are all motivated to keep it up, but it's easier to tell from the outside. My specific question is around the political climate, but very specifically, around the EPA review of its rules that was mandated a couple of months ago by President Trump and how it might affect MATS? And if the EPA does a review and radically changes its economic assessment of costs and benefits, first of all, how likely do you think that would be? And secondly, what impact would that have on your various businesses? And then I have a follow up. Thank you.

Yes. Okay. So you're referring to MATS, which is the mercury rules that were put in place, those regulations in 2015 and then finalized in 2016. So though the EPA has – or is in the process of reviewing those again, the consensus across the marketplace with our customers as well as other providers in this that it's most likely that MATS will stay in place. And MATS – again, what that market affect is our chemical business on our EC side. If for some reason that, that was overturned that would not be good for our business. But again, it's unlikely, because the majority of the investment that had to be made in equipment has occurred over the last four years, five years or so. So everyone is up and running, and it's working, and it's providing the mercury reductions that were put in place. So again, the marketplace thinks it's unlikely, but we'll wait and see what happens with the EPA and that would be detrimental to our EC business. The Refined Coal business, though that is also mercury control and NOx control, it should have no impact. So the majority of our cash flow should be secure regardless of what comes out of the EPA related to MATS.

Okay. That's very helpful. Thank you. And then the follow-up, I was interested to learn about the IRS letter that you had talked about in your comments. Maybe you could expand a little bit on that? That's not an angle that I had been – at least, I had been aware of. I'd love to know, first of all, how can we investors just get up to speed and learn more about the issue? And secondly, can you expand upon why you think this is actually a favorable development?

Yes. So the ruling that came out from the IRS, if you understand the rules around how the stuff works, this was for a specific investor that is not a Tinuum investor. And this announcement came out from a legal newsletter. So the market has known about this, but it's not public yet. When it becomes public and the IRS issues it, who knows? And that's when I think the broader market would get understanding. But because this was disclosed by this legal newsletter, I wanted to mention it, because I think it's a valuable part of – for everyone to understand. For us, internally, and for people in the tax equity market that have the structures like we have, we feel good about that and that specific ruling, that again was announced in this newsletter, provided an opportunity to talk about it and also to understand how the IRS ruled in this specific example. We know how they ruled, and we know that based on that ruling, we don't do that which is why we feel good about our current structures that we put in place at Tinuum. And again, that ruling has been rumored to be out there for a number of months, since early 2016, and it really froze the market. So because that now has come out and it's more visible to everybody, that's why we are more encouraged about having conversations primarily with new people, and we would be able to articulate why our business model at Tinuum and our structure is the right one to follow. So it just provides more clarity to the marketplace that wasn't there in early 2016.

And a final question, and maybe this is something to take off-line, but is there any way that you can explain just in some specificity, what it is about the ruling, I mean the expected ruling? And what it is about what Tinuum does that are distinct from each other?

Yes. So in a simple terms, in all tax equity in general, including refined coal, an investor has to be a real investor. They have to take the commercial risks of ups and downs. That is the primary objective of being an investor. If you do that, if you hear to that, the spirit of that and your contracts reflect that, you're going to be okay. If you wanted to look at some rulings that came out in a different – it's called the Boardwalk case, and this was a couple of years ago, and it was in housing credits. But that really help establish why an investor needs to be a real investor. If you read that, you'll get some context around the structures that should be in place, and that we at Tinuum have been in place as well. So that's the high level. There's a lot more behind that, and we can talk about that off-line. I can educate you more.

The next question comes from the line of [Steve Santos, RBC], retired. Your line is open.

Hi. Good morning, gentlemen. Very nice quarter. Thank you. I just have a couple of basic questions, I guess. Number one, on this IRS letter that you referred to, is it a correct summary to think that this may have had some impact on the difficulty you appeared to be having in closing the RC investors? And are you thinking this will provide some clarity going forward?

Yes. It has had an effect on the market in general and for sure us. There are specific investors that we were talking to that actually went on the sidelines until there was clarity around this situation. So direct impact as well as this kind of broader indirect impact. So we are encouraged that this has come out, because it provides a clarity and allows us to reengage on those other previous conversations as well as establish new conversations. So it's been a positive impact coming out.

Okay. Hopefully so. Also, could you give a quick summary as to this, what I interpret as a poison pill on these preferred shares that you'll be issuing to us? Are you able to comment on this at this point?

Yes, yes, so yes, it is a poison pill, but we explicitly call it a tax asset protection plan, because that's the sole purpose of it. We have valuable tax credits, NOLs and tax assets on our balance sheet. And if there was a change of control, and I won't get into the rules around what the IRS has on those, but if there was a change of control that could occur by shareholders trading, that would trip the IRS rules and then we would lose a significant portion of those tax assets. So that is the reason why we put that in place. And then how it works, it's not that we don't want shareholders to come in and out. What we want is to ensure that we are aware of that, so we can properly approve and analyze whether or not there would be a change of control or at risks to that change of control. If it was, then again we'd allow it. So it really is a plan we put in place to ensure we had visibility and control the trading at these certain levels to ensure we protect those tax assets. That's the primary objective of why we put this in place.

And if I read the disclosure, you have the ability to absorb any individual or group of investors from that. You wouldn't simply not trigger that classification, is that correct?

Yes. I think I understand you question. It's correct. We have the ability to look at that and analyze that. If we saw that it was going to add risk or trigger, we wouldn't allow it. If it didn't, we'd allow it. So the simple way just gives us visibility to ensure that we don't trip that change of control per the IRS rules.

Okay. Good. And lastly, the $5.3 million in tax allocations with $113 million NOLs and tax credit on the books, is it a safe assumption this is simply GAAP accounting method that will be zeroed out by the end of the year?

So when we reversed a portion of the valuation allowance at the end of last year, once we did that, it was going to have a P&L impact going forward rather than just a balance sheet impact on the change in valuation allowance. To the extent that we are utilizing deferred tax assets other than tax credits, it would be a non-cash impacting situation at the end of the year to the extent that we've utilized tax credits during the year, 25% of that would result in a cash payment, just due to rules on how much you can offset tax expense related to tax credits and not have to pay cash. End of Q&A

There are no further questions at this time. Mr. Heath Sampson, I'll turn the call back to you for closing comments.

Well, great. Thanks, again, to everyone for your time today and your continued support. I look forward to updating you all in the progress during the next earning results call. Have a great day, everyone.

This concludes today's conference call. You may now disconnect.