July 15, 2012 - 1:53am EST by
2012 2013
Price: 23.67 EPS $2.00 $7.50
Shares Out. (in M): 10 P/E 11.8x 3.2x
Market Cap (in $M): 237 P/FCF 11.8x 3.2x
Net Debt (in $M): -28 EBIT 20 75
TEV (in $M): 209 TEV/EBIT 10.0x 2.8x

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  • Underfollowed
  • Engineering Services
  • Coal
  • Short squeeze
  • Sum Of The Parts (SOTP)


ADA ES is an unusual little company on the verge of tremendous growth in earnings and cash flow and is extremely under followed.  The company focuses on bringing various technologies to meet emissions challenges primarly for coal-fired power plants.  Currently, the biggest focus is on the control of Hg.  ADA employs scientists, consultants and engineers and has historically assisted power plants in testing and monitoring of emissions.  This has made them a known quantity in the industry for awhile which is important I think when considering someone trying to bring new things to bear in a slow moving conserative industry like power.  They fancy themselves problem solvers, ie they want to be positioned to assist power plants meet the various emissions and monitoring requirements as they are handed down. 
They organize themselves in a few business segments, and I think it will become clear why its easier to think of the company this way when it comes to both understanding the business and valuation.
Emission Control
Historically, their primary business unit was Emissions Control.  This unit sold Acitvated Carbon Injection Systems, or ACI.  They also had a JV which made the actual consumable, activated carbon.  The idea is that this is a razor and razor blade type business.  They sell the low capex ACI installation, for ~$1mm upfront, and with the use of the activated carbon allows them to reduce Hg emissions.  They had historically had bit over 30% share (47 of 150 installed in US).  The bulk of these were done in the current 19 states with tight Hg emissions levels.  This market gets bigger in 2015 with the passage of MATS which requires over 90% reduction in Hg emissions nationwide.  This business got them into trouble last year when a judgment was levied against their JV Carbon Solutions in a dispute with Norit, another activated carbon manufacturer.  Without getting too deep into it now as its not really important going forward, they had to pay some money and give up their equity ownership in the Carbon Solutions JV (the part that makes the activated carbon, not the business that sells the "razors" the ACI systems).  Now with MATS coming, the market for these systems is expected to explode.  Estimates have been that an additional 500-700 systems nationwide are likely to be built over the next few years.  This is good news for ADA as they are a leader in this and should benefit from the increasing demand.  Indeed, they have begun to receive large fleetwide RFPs for months.  ADA has also been developing a new system called DSI for Dry Sorbant Injection.  These systems utilize a hydrated lime substance to neutralize various acid gases.  These will sell for maybe $2-3mm per and the EPA suggests maybe 200 of these could be sold by 2015.  The importance and reason ADA has been developing this will be made clear in time.
Refined Coal
Refined Coal, RC, is a term defined by the IRS statue that says - if you can reduce NOx emissions by 20%, and either Hg or SOx by 40%, you can get a tax credit (for 2012 $6.47 per ton created and sold to an unrelated person) for up to 10yrs after the facility is put into service.  This was included in a bill in '09 I think originally with a deadline, you actually had to "build" and qualify a facility by the end of 2010.  The tax extenders bill subsequent to that included a 1yr extension to build these facilities and limited it to 12/31/11.  I am leaving out some background, but basically ADA built 28 of these systems and had them qualified as facilities to be able to earn these tax credits for the next 10yrs.  Arthur J Galagher - a public insurance brokerage of all things, invested in a sort of competitor called Chem-Mod and has provided a lot of detail in a lengthy clean coal presentation available on their website.  For other background, check out and a ton of other sites on google if interested more in background independent of ADA's materials.  Regardless, this is business that is changing ADA. 
I will try to simplify how this works by going through a single facility example.  ADA doesn't have taxable income historically, and certainly not enough to utilize the avalanche of tax credits that they are going to be generating shortly.  So here's how it works.  ADA finds a power plant with the right sort of boiler setup (cyclone boiler or circulated fluid boilers) and that generally burns western coal, principally PRB (important, will come back to this).  They go through the myriad of slow moving approvals (power plant, PUC, air permit, etc etc) and they find a monetizer.  A monetizer is someone who has a large tax credit appetite.  The monetizer, ADA, and the utility set up tons of contracts all with each other, and many monetizers want to wait for a private letter ruling, or PLR, from the IRS and then their off.  The takeway here is that it can take considerable time even when everyone wants to make refined coal at a powerplant, before they can actually get up and running, think months and months.  ADA sells the facility to the monetizer and the monetizer has to buy the coal, ADA operates the facility and treats the coal, and then the power company burns the coal.  Monetizer receives $6.47/ton treated in tax credits.  In practice, the monetizer pays ~$1/ton to the utility (getting paid to reduce emissions, not bad), it actually costs a couple of bucks to pay for 24hr labor and materials to run the treatment, and the pays the rest of the balance to the JV (ADA doesn't do this directly, it owns 42.5% of the JV).  What's left for the monetizer?  Accelerated depreciation on the facility that it purchased, and $6.47 of opex losses for tax purposes or over $2.30/ton of tax savings and very, very high irr's for 10yrs.  When its all over I believe ADA's cut is ~$1.70/ton with reason to believe that that could continue to trend up (new monetizers bidding irr's lower, and a second type of RC facility gets them better splits - M45). 
Goldman Sachs has been the monetizer for the first few facilities and has hand picked a few more.  ADA has now found no less than 2 other monetizers who are doing it at more favorable rates and this trend is likely to continue.  GS liked the situation so much that they purchased a 15% senior interest in the JV for $60mm in 5/11 (think about implied value of JV in context of the TEV of ADES, ADEs owns 42.5%).  The JV has gotten materially more valuable and will treat many more tons then was visible back then.
Regardless, right now, ADA has 7 of the 28 facilities running around the clock and an 8th is currently close to getting its PUC approval expected by August.  This will have them treating ~23mmtpa of coal on an annual run rate (all tonnage is based on historical burn rates as that is how the company measures it).  The company has provided guidance that they expect to be at least at 30mmtpa by the end of the year, this equates to $50mm of EBIT (their share) per year from the JV.  The JV expects to hold ~1 out of every 5 facilities itself so the JV won't wind up paying taxes, so that EBIT is really E or FCF.  A full 15 of the 28 facilites are currently sitting at power plants believed to be their permanent homes.  They need to convert between 2 and 5 of the remaining 7 (15 in place, 8 up by aug) to get to that guidance by year end.  The balance have designated targets (they only built facilities with an eye to where they could be seated, but it takes time to get the glacially slow power industry to do anything, and so for various reasons, they don't expect to have all 28 up and running until sometime later in 2013.  The company had historically said 50mm in EBIT was the opportunity here.  The numbers nevered added up, it always seemed much much bigger, and eventually the company relented this year and said, that they could have their share of the JV's cash flow reach up to $100mm/yr.  I think an objective review of the facts suggest $120mm+ is possible/likely, but even at $90-100mm/yr for the remaining 10years of life, you have a single JV spitting out $9-10/shr per annum.  I think 60mmtpa of coal treated is a decent floor, particularly when some of the largest powerplants they are targeting are yet to come.
Enhanced Coal
Enhanced Coal, or EC, is really an exciting business venture.  It is a cousin of sorts of RC.  Its focused only on reducing Hg emmisions, not the NOx too.  It is based on the chemical in RC and could be a long term business vs the other two segments which have a specific lifespan.  They have a partnership currently with Arch Coal, such that ADA will receive a split of the price premium they get on PRB treated at the mine site (coal sprayed with additive) up to $1/ton.  Arch does b/w 100-130mmtpa or PRB sales.  However the partnership is only exclusive with Arch for coal treated at the mine site, for coal treated at the power plant, ADA can treat anyone's coal and charge whatever the market will bear.  This business opportunity is huge.  600mmtpa of western coal is burned here every year.  For any power plant needing a low capex, and modest opex solution for Hg emissions for MATS compliance in 2015, here it is gift wrapped.  There is also an opportunity here to supplant some of the existing AC contracts that manufacturers have with current power plants.  ADA's vision is this:  A power plant needs to control its Hg.  Rather then spend a fortune on capex, and to reduce opex spent on activated carbon, ADA wants them to still have AC as a redundant backup (so still buy the fleet wide ACI systems from ADA b/c they are cheap), but also build a EC facility and pay ADA to treat your coal more cheaply then what you pay for AC.  Also, Hg control on higher sulphur coals is tricky as it reduces effectiveness of AC, causing usage to go up many multiples, so by addressing SOx (enter DSI systems - see above) ADA might be able to treat non PRB coals, and indeed are getting good results now on certain lignites and I belive are working on bituminous coals in experiments as well.  This suggests they could get this to be a MATS solution for more than just PRB in the future.  They think they could get to 1/3 of the 600mmtpa of western coals, and if they can stretch to eastern coals or other lignites, the numbers go up.  But the at power plant business is expected to be much larger than the partnership with Arch, one can easily expect to see >75c/ton of ebitda margins (really probably over $1, but trying to layer in conservatism).  This would be a next to 0 capex business and pretty immune to macro effects.  At even 70mmtpa their over $50mm/yr in ebitda from this biz, and think it could very easily be double that.  This isn't a science project.  The technology is very similar to the RC treatment, and they have tested several trainloads of coal from Arch's mines to different powerplants and had successful results. 
Carbon Capture
I'd be remiss if I didn't at least mention that the company does work on things other than Hg.  The are currently scaling up a 1MW demonstration plant which they believe will showcase their successful testing done on smaller scale setups.  They are doing CO2 capture, but rather than traditional sequestration, they can do it with a solid sorbent I believe, and its much more efficient.  They are funding with DOE and industry money.  This hasn't been a big focus of my investment research, and I chalk it up as an option.
I am normally somewhat dismissive of SOTP analysis as not being particularly predictive of how the market will value something, but think this sets itself up for a SOTP valuation. 
Emission Control is hard to value as a going concern.  They might well start trying to sell this stuff overseas in a few years as china gets concerned with emissions (another option you're long) but right now let's just focus on cash generated in the rush prior to MATS mandated compliance.
Year     Dec-11 Dec-12 Dec-13 Dec-14 Dec-15  
Systems   Installed Est     25 150 225 90 490
ADES share     35% 35% 35% 35% 35%  
ACI   Systems sold     9 53 79 32  
Px (mm)     1.1 1.1 1.1 1.1 1.1  
ACI Rev       10 58 87 35 $189
Systems   Installed - Average Estimate   5 60 85 25  
ADES share     13% 13% 13% 13% 13%  
DSI   Systems sold     1 8 11 3  
Revenue   Per System   2.5 3 3 3 3  
Annual   DSI Systems Revenue   2 19 27 8 $55
Annual   Total Rev     11 77 113 42 243
margin     20.0% 20.0% 20.0% 20.0% 20.0%  
EBITDA       2 15 23 8  
 So pick your discount rate but I get ~$30mm or so.
RC, I have a much more granular model than this, but wanted to get the basic punchline easily.
Year     Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21
Systems     17 28 28 28 28 28 28 28 26 26
Tonnage   mmtpa   1.2 1.9 2.2 2.2 2.2 2.2 2.2 2.2 2.4 2.4
Total   tonnage   19.9 53.3 62.5 62.5 62.5 62.5 62.5 62.5 61.5 61.5
ADES   realized cash flow   $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50
EBITDA     30 80 94 94 94 94 94 94 92 92
NPV 15.0% 403.7                    
For EC, again this is really more back of the envelope and I have much more detailed thoughts on this too, but just to get the point across. 
tons treated   (mmtpa) 50 70 100 150
EBITDA $/ton   $0.70 $0.70 $0.70 $0.70
EBITDA/yr   35.0 49.0 70.0 105.0
Multiple 8.0x   280.0 392.0 560.0 840.0
Total Valuation                
Emission   Control   30 30 30 30      
RC     404 404 404 404      
EC     280 392 560 840      
SG&A  7.0x   (105) (105) (105) (105)   15mm g&a at 7x multiple
Future   royalty payments  (25) (25) (25) (25)   payments on old activated carbon   settlement
Cash     28 28 28 28      
      612 724 892 1,172      
SOUS 10.0   $61.14 $72.34 $89.13 $117.12      
I show this as more illustrative.  This ignores the huge influx of prepaid rent cash they will get this year.  This ignores any optionality on CO2 capture developments.  I tried to be conservative and left out a lot of detail and background so hit me up if there are any questions.  Bottom line is the company will likely be on a $9+/shr fcf run rate by 2H13.  By the end of August, they are likely going to be ~75% towards year end target of $5/shr fcf run rate by end of this year.  All of these numbers are just from the RC JV.  Valuation is tricky, and trying to peg a single number on something like this is a futile exercise, but the business prospects have never been better.  I think the recent sell off has to do with retail holders (stock is very illiquid) selling based on not understanding the SEC inquiry which has to do with a difference of opinion on whether they should be taking a valuation allowance vs their DTA (sec says, you never generate EBT, ADA says we are about to in a big way and they are building up credits as we speak).  Completely trivial, but that seemed to get the stock rolling over, and with Patriot filing for bankruptcy, also seemed to take anything perceived as coal related lower.  Well PCX went in because it mines expensive CAPP coal and has a cost structure that is totally uncompetitive.  ADES treats principally PRB type coals which are generally competitive with nat gas nationwide at ~$2.50 (see JPM estimates).  Weather was mild this spring, so usage was down, but over the last couple of months, their target plants principally in the midwest have been running flat out due to the heat.  I really struggle to rationalize valuations below $60 and see it as a very high likelihood that this is more like a $70-85 dollar stock.  9% short interest all of the sudden, and a quick glance at the chart will show you that the stock can be very volatile, but the company is on the verge of transformation, and the RC business is ramping now.  I would love to hear from others who are familiar with the name to get their thoughts.


Catalysts include receipt of PLRs imminently which will convert some more of the currently running plants in to monetized cash flowing plants and derisk and speed up more approvals.  Also company getting to $5+/shr annual cash flow run rate from the RC JV by year end will be hard for the market to ignore.  9% short interest is going to get really squeezed and cause this thing to bounce hard.
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