Good morning. My name is Sharon and I will be your conference operator today. At this time, I'd like to welcome everyone to the Advanced Emissions Solutions Q3 2017 Earnings Conference Call. [Operator Instructions]. Thank you. Ryan Coleman, Alpha IR, you may begin your conference.

Thank you, Sharon. Good morning, everyone, and thank you for joining us today for our third quarter 2017 earnings results call. With me on the call this morning are Heath Sampson, President and Chief Executive Officer; and Greg Marken, Chief Accounting Officer. This conference call is being webcast live within the investors section of our website. A webcast replay will also be available on our site and you can contact Alpha IR Group for Investor Relations support at 312-445-2870. Let me remind you that the 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 September 30th, 2017 and other filings with the Securities and Exchange Commission. Except as expressly required by securities laws, the company undertakes no obligation to update those factors or any forward-looking statements to reflect future events, developments or changed 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'll turn the call over to Heath Sampson. Heath?

Thanks, Ryan, and thanks to everyone for joining us this morning. Let's begin with Slide 3 and review some of the highlights. Our business plan continues to mature and our momentum continues to build. We saw yet another strong quarter of distributions in the Refined Coal segment as well as continued efforts in the validation of our chemicals business against an increasingly competitive landscape within the Emissions Control segment. Our cash position remained strong, which grants us the flexibility to dynamically evaluate our capital allocation plan and structure. We also remain focused on our shareholder return initiatives paying the second quarterly dividend in the company's history in September and approving the third yesterday, which will be payable in December. Overall, we feel -- we are feeling very well positioned to execute our strategy as we progress toward the end of the year and beyond. The third quarter continued to see favorable progression in the Refined Coal segment of our business, which was reflected by the transaction for half our RC facility in late July, ongoing strong distributions from Tinuum as well as continued momentum in our tax equity investor pipeline. Distributions from Tinuum were $11.9 million during the period, in line with expectation and above the prior year of $10.7 million. For the first 9 months of the year, Tinuum distributions have totaled $37 million, which were nearly 18% higher than the $31.5 million in distributions through the first 9 months of last year. In addition to these distributions, we had a sequential and year-over-year increase in royalties driven by additional RC units that are royalty bearing. Quickly circling back to the July RC closure, this project is located at a coal burning power plant that has historically burned in excess of 3.5 million tons of coal per year and…

Thank you, Heath. Let's start on Slide 5 to review our third quarter financial results. As Heath mentioned, we observed lower revenues during the third quarter almost entirely attributable to the decrease in revenue derived from our legacy equipment business. Total revenue for the quarter was $2.3 million compared to $15.7 million in the third quarter of the prior year. Again, this decrease was expected and future quarters will yield minimal equipment revenue as we complete our historical commitment to that business and work through the remainder of our backlog. As discussed in the 10-Q, upon the adoption of the new revenue recognition standard on January 1, 2018, we anticipate all material currently contracted equipment systems to be recognized through an opening balance sheet adjustment. Thus we would not expect any material equipment revenues in 2018 under the new revenue recognition standard. Revenue generated from the chemicals business came in at $717,000 this period versus $670,000 last year. As Heath discussed, this newer start-up businesses is expected to yield lumpy quarterly sales figures as we continue to validate our proprietary chemical technology offerings and compete for market share against a fragmented and dynamic environment. The main takeaway from this period is the strong pipeline of potential buyers and our continued assessment of the landscape that is increasingly shifting to a commodity market. As such, the commodity based sales process with potential buyers has led to some margin compression as we continue to compete for an expanded customer base. The process involves being on site with the utility and actually getting the product itself into the potential buyer's hands. From there, potential buyers will complete a test cycle, which can lengthen the duration and potential cost of the client acquisition cycle. This trend has been industry wide as new competitors have…

Thanks, Greg. I'd like to take a moment to review our go-forward strategy in each of our business segments. Let's start on Slide 7 and talk about the current refined coal environment. As I mentioned earlier and on our last earnings call, the refined coal environment has undergone favorable shifts this year. After somewhat of a frozen environment in 2016, the IRS' publication of the technical advice memorandum as well as more favorable outlook on domestic coal production has led to significant build in our tax equity investor pipeline. The publication of the TAM and what we believe was a validation of our tax equity model has brought both new and legacy investors to the discussion table and we have been very pleased with the pace and cadence of those negotiations. We see the July closure and the expected near-term future RC deal closures as affirmation that our model, approach and the favorable landscape has provided an environment that is more conducive to multiple RC closures. Slide 8 shows the current invested in operational facilities versus the non-invested facilities that are not operating. As of September 30, Tinuum has leased or sold 15 facilities with the remaining 13 facilities either installed and awaiting a tax equity investor or awaiting for a utility and tax equity investor. But the challenge here again does not necessarily lie within identifying the utilities, but rather in identifying tax equity investors to invest in the idle units. As shown in the right side of the slide, there is enough capacity for Tinuum to effectively double production provided the remaining facilities can be leased or sold. Slide 9 provides the quarter-by-quarter breakdown of Tinuum operating volumes and retained tonnage. As a reminder, retained tonnage is tonnage we operate on our own behalf. We pay the operating…

[Operator Instructions]. Your first question comes from Amit Dayal from H.C. Wainwright.

Any visibility of closing any additional RC facilities before the end of the year?

Yes. Like we talked about the -- we have many good discussions and are close on a couple of facilities. What's in front of us right now is the recent house bill that came out around tax reform so everybody is digesting that. So as we move through that and there's more clarity in that because it does need to be finalized, we just got to make sure that what's in there is currently what we expect to be in there and that our -- that our investors that are close agree with that. So, we should expect closures this year.

Understood. And in regards to the chemicals business, you said you're seeing some pricing pressure, but at the same time have you lost any customers or are these customers just not sort of ordering as frequently as they used to? Can you give us some color on that aspect of the business?

Yes. So, most of our activities because we're new to the market is trying to displace incumbents so that's a lot of our activity. We have, like I mentioned in the script, 1 of our largest customers has stopped buying from us as they have higher weight this dynamic market. There's a lot of pricing movement and different competitors are doing different things. So in the short term, we have lost 1 of our large customers not because they've gone to a competitor, they're just using their current solution right now. So, we expect that there will be a -- again this will be competitive for the next number of months. There's a lot of RFPs with large utilities that are currently out and those should expect to be awarding over the next number of months. So, it will be clarity within this market for us and for everybody else in the marketplace in this next year or so.

Understood. Just one last one from me. On the R&D side, I'm seeing some fluctuations over the last 3 quarters. Can you talk about what's driving this fluctuation?

In the quarterly numbers, there is a little bit of noise in previous quarters about some of the reimbursements we've had from legacy Department of Energy reimbursements. Right now our spend is fairly focused to just monetizing our current IP portfolio so this last quarter is probably more representative of what we should see going forward.

Your next question comes from Sameer from H.C. Wainwright.

Just to follow up on some of Amit's questions. The RC facility that was deployed in July, it was 50% or 49% owned or sold something like that, am I right?

Yes. So, the right way to think about it so half of the facility was with an external third party, the other half is retained by Tinuum and therefore we get our -- basically our half of that other half. So it's fully monetized, which is half in an external, half with Tinuum.

And so the royalty payments and the actual proceeds from Tinuum to you, how should we look at them? Should we look at it as a whole facility and then expense it somehow or can you explain how you look at it accounting wise?

Yes, I know, it's a good question. From a royalty perspective, assume that it is a full facility because the full facility was monetized so we will get royalties for a full facility. Because we are in essence monetizing ourselves or what we say retain from a Tinuum perspective and externally, the cash flow is about neutral. So, the cash we receive from the investor and the cash that we need to fund the operations of retained facilities is basically a push. So, that's the right way to think about that. We also -- but the other thing you have to realize when you're building out your model is that we're going to receive tax assets on our half that we have invested as well. So cash flow neutral, tax assets going up, royalty payments assumed as if it's a full facility.

Okay. And then one last one. The remaining RC facilities, should we expect the average tonnage or capacity to be the same as the previous 15 already installed?

I think it will be trending up over the previous 15 and closer to that $4 million-ish per facility.

Your next question comes from Kevin from Stifel.

My question is in regards to the chemicals. Can you tell me about corrosion in the different products that are available and competitive advantages out there?

So, our proprietary technology no one can use in the chemical space. The chemical we use, we basically can use at least 10x less. So when you think about the impacts around primarily the halogens, the competitor product is more corrosive and that's a major advantage for us being able to go into a power plant is that our technology is less corrosive. In addition, because there's less, it's easier from a supply chain perspective and operating perspective and then where we place it allows for an ease of operation. So you put all that together, that's our main competitive advantage compared to the corrosive competitor's products and more operationally intensive as well. But really when you think about that, it's also important for us to be competitive on price. Though we have those competitive advantages and the protected IP, we've needed to properly pivot and have a more competitive price because that's a major factor for a majority of the utilities to survive.

All right. And just kind of a follow-up. The less corrosive side of it is what you anticipate to drive the business?

Yes, that's one of the factors that's a big competitive advantage for us versus our competing product. Absolutely.

[Operator Instructions]. Your next question comes from Steve, private investor.

Former crew with RBC. At any rate, it's been a long time and I'm wondering could you explain to us in layman's terms why we're not making greater use of the tax credits you have on the books right now to offset those tax liabilities?

So if you're sophisticated to look at our balance sheet and see that we have a lot of tax assets, a good portion of those tax assets are reserved but we do have a lot of tax assets and the potential to get more tax assets. So, we are using -- the reason why a couple quarters ago that we were able to release our valuation allowance were for a couple reasons. We cleaned up the company and are not burning cash flow and in addition to the positive momentum and progress that we have in the refined coal business, we're utilizing significant tax assets each quarter and you can see that as each quarter goes by and Greg talked about it that we are utilizing those tax assets. And with those cash flows that we expect through 2021, we will utilize our tax assets for that. So, the right way to think about it is that we have enough tax assets currently on our book to shelter a good chunk of our expected income from the RC facility. The other thing that I mentioned, we are currently looking at investment opportunities that allow us to further utilize tax assets. So it is an important part of our strategy, we've started to execute on that as we're using them and we expect to continue to look for opportunities to use even more.

Okay. So, if I understand you correctly, you're amortizing the assets that you have on the books over good results in '21 lifespan of ex-credits have hopefully gone forward from there.

Yes. Maybe said a different way, we're utilizing our tax assets to shelter our income that we expect to have over the next number of years. That's correct.

Okay. Secondly, you indicate that you anticipate given the 15 units are currently deployed and monetized that you should be able to generate upwards of $450 million through to the end of 2021. And the market, apparently given the limited coverage that we have at this point, is valuing the company essentially at that level not giving any credit at this point to maybe further expansion of the chemical business or acquisitions that you might have. Is there any way forward as to how you might be able to expand that outlook or possibly coverage from analysts to increase the market cap in the company because it seems to me your market cap will diminish, share price will diminish as more and more cash is distributed as time goes on without some expansion going forward.

Good insight into our current stock price versus the cash that we have coming in, you're correct. I can tell you my philosophy -- our philosophy is to execute and improve those results, that's the best way to show to current shareholders and future shareholders that we are doing more than what we have. So, that's priority 1 and I feel really good about where we are with the RC business and though slower where we are with the chemical business. And then 2, the other optionality around potentially having investments. So, that is absolutely our priority to increase value and therefore increase our cash flows coming into the business and therefore stock price. But we'll be disciplined in that approach and we'll continue to evaluate whether it makes sense to dividend back or buy more stock back. But you're correct in your assessment, let the results speak for themselves. We'll continue to be in the marketplace telling our story and I'm optimistic that as we continue to execute, that will be reflective in our shareholders and hopefully our stock price.

Okay. Just one last comment. I know it's impossible to project in terms of future, but is there any hope that you can see in 2021 or before that that Congress would like to extend the Section 45 tax credit that will expire at the end of '21.

Yes, I get that question a lot and though we are close to everybody in Washington and the necessary regulators in the space, I think it's very unlikely that the tax credit in Section 45 particularly as relates to refined coal would be extended.

In my recollection that the credits as per Section 29 tax credits had been extended at some point [indiscernible]?

That's a good question. There's definitely a different time in this environment especially in the energy space and for sure in the coal burning fireplace -- coal burning utility space. So, I don't remember if that happened in Section 29. Again I think it's unlikely in our current environment that these tax credits will be extended beyond 2021.

Your next question comes from Shantanu from BlackRock.

My question is regarding the RC facilities, I just want to revisit some of your comments there. You said you hope to close on a couple facilities this year. Given it's already November, there isn't that much time left in the year so you really are saying that you're pretty optimistic on closures over the next 45 days or so. Is that the right read that if this conference call is not held today, but maybe a month or so in the future, there would be a little bit more tangible progress to potentially talk about on the monetization front?

It's a good question, Shantanu, and I was deliberate in my words around near term without giving a specific timeframe because these discussions that we're in, it really has to do with tax reform. So because I feel good about where we are, I didn't want to nail us down to a specific date because of the uncertainty that potentially could come out from the government in this. So we feel good about where we are, I think it's the right read to save through this year and if that changes, of course I'd be updating you. I'm giving some information that I think we're close and if that changes, I would let you know as well in this near-term future. So, again I think we're in a good spot this year to have a few closures in the near term.

Understood. And then is it correct to read as well that on your forward pipeline, the average facilities are larger than your current facilities. It looks to me that your average facility today is running something like 3 million tons per year and I think you said maybe we should be using something like 4 million tons on any future closures to the extent you can close them. So, kind of the future monetizations could be 30% plus bigger.

Yes. I think on average, that's the right thing to do, it's 4 million tons. There's a wide range of what it could be for our utilities that are there, but I'm confident that it's going to be above our current run rate in average for the remainder of those facilities. So, I think that's a good range to use is the 4 million tons.

Got it. And in terms of tax reform in your pipeline, you guys are obviously in active negotiations. Have any of your potential customers gone through the tax reform and kind of blessed it and said there are no whammies here?

Yes. So, I like your term no whammies. That was a big part of what we looked at, Tinuum looked at and our related attorneys looked at in the House bill and there are no whammies against the credit itself so that's wonderful news. So, really it's down to what else is in that tax reform that would affect the business case. What's the rate going to be, the corporate tax rate going to be? When is that corporate tax rate going to be effective? What is the effect potentially on the AMT? So there's no whammies, which is great, and we don't expect there to be whammies to continue to use your term.

But some of that is also a positive right on the AMT?

Yes. It's the right way to think about it. I think what we see in tax reform is potentially positive and opening up other parts of the market. I don't want to get too bullish on that because it's new and who knows the timing of that. But in general, I think the right way to think about it is there's nothing negative in there. Now, it's just trying to the plum the business case based on what the expectations are and how this final plan does nail out. We'll update you more as time goes of course.

And the final question from me, just talking about cash. I mean you're sitting on a lot of cash and over $1 a share at this point going into year-end. Is the board considering special dividends and more share buybacks? I know you talked about M&A. But can you talk a little bit more about the dividend and buyback potential?

So, it's definitely that cash is on our balance sheet and if in the event that we don't find anything in the right timeframe that would truly be accretive to our stock price, then it's absolutely on the table to do buybacks or dividends. So we're evaluating that on a quarter-by-quarter, month-by-month basis and we'll make the right decision as we move through the rest of this year and next year.

Great. Hopefully we get some positive news into year-end. Good luck.

At this time, I will turn the call over to the presenters.

Well, thanks again to everyone for your time today and your continued support. I look forward to updating you all on our progress. Have a great day, everyone.

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