Avondale - ADA Report 11-2011

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Important Disclosures on Page 6

ADA-ES, Inc. (NASDAQ:ADES)

ADES - Maintain Mkt Perform; Waiting For Success on M45MARKET PERFORM COMPANY UPDATE

Emission Control Technologies November 10, 2011

Daniel J. Mannes, CFA, Director [email protected] 610-727-3878Brian Shore, Senior Associate [email protected] 615-467-3453

Price ($) 15.0052 Wk Range ($) 4.54-24.92Price Target ($) 14.00Market Cap ($mil) 144.0Enterprise Value ($mil) 138Avg. Daily Vol. (000s) 16Price / Book 3.0xCash Per Share ($) 4.40Net Debt / Cap. 0%Shares Out (mil) 9.6Div($)/Yield(%) /0.0%

FYE - Dec 2010E 2011E 2012E1Q (0.39)A (3.62)A NE2Q (0.50)A (0.30)A NE3Q (0.79)A (0.50)A NE4Q (0.42)A (0.32) NE

FY EPS ($) (2.13)A (6.76) 0.43y/y % chg 64% NA NA

FY EPS (Old) (2.13)A (6.73) 0.23FY EBITDA ($mil) (32.7)A (11.8) 12.2

CY EPS ($) (2.13)A (6.76) 0.43CY P/E NM NM NM

ActionWe maintain our Mkt Perform rating and $14 PT on ADES following its Q3 results/call. While recognizing thepotential upside from M45, we find it premature to include in our model given limited tests to date and a tightwindow to qualify facilities. Our estimates assume successful deployment of Cyclean, but not yet for M-45 andwe remain on the sidelines with ADES shares until we have more clarity on M-45 execution and economics.

Key Details and Summary Perspectives

Q3 Results - EPS of $0.50 fell short of our 32 cent loss estimate as incremental arbitration costs weighedon results. Looking forward, those costs should diminish and SG&A has begun to improve with lowerlegal expenses. Admittedly, quarterly results are not terribly meaningful as they do not reflect the potentialearnings from refined coal and M-45. ADES ended the q with $9.5 mm in cash and subsequent to quarter

end, raised ~$30 mm in cash through an equity raise.Cyclean Progress Continues - During Q3, ADES started up 8 incremental Cyclean units with 4 more startedin Q4. That leaves 8 more by year end to meet the stretch goal of 20. In total, ADES expects these unitsto add 30 mm tons of refined coal annually. We conservatively model for 25 mm tons (in addition to thelegacy 7 mm tons). Each incremental mm tons beyond our estimate would add $1 mm pre-tax income and6 cents of incremental after tax earnings to ADES.

M-45 Represents Upside Potential - Similar to Cyclean, M-45 qualifies for a $6.33 per ton tax credit asit reduces NOx/Hg emissions by 20/40%. ADES plans to fabricate 6 of these units that could treat 10-20mm tons of coal. To date, this product has only been tested on 1 plant so its broad applicability is as yetunknown. ADES is also somewhat unsure on its margin profile which could range between $1-2 per ton of operating income to ADES. We conservatively assume none of these units are qualified by year end, giventhe tight time frame. This represents the primary upside to our assumptions and at 10 mm tons in service,

ADES could garner an incremental $10-$20 mm of operating income annually ($0.60 - $1.20 in EPS).Norit Arbitration In the Past, Indemnification Still To Be Decided - ADES has now settled with Noritand paid the majority of its fees. However, ADES still owns 21% of the activated carbon plant and owes$30+ mm to its partner ECP under the indemnification. It is unclear if ADES will also have to reimburseECP for the running royalty to Norit. We expect ADES to turn over its stake in the AC plant to ECP to meetits indemnification obligations, but additional cash payments may be needed as well.

We retain our Market Perform Rating and $14 Price Target following quarterly resutls. ADES has seenimprovements in costs as legal expenses have dwindled and is beginning to execute on its plan to furthercommercialize Cyclean and M-45. Our $14 Price Target assumes successful deployment of 32 mm tonsof Cyclean. With tight time frames and technology uncertainty on M-45, we are unwilling to take a moreaggressive view. However we do recognize the potential upside if ADES is successful.



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Details

ADES Model ChangesQ3 Results 2011 Estimates 2012 2013

$ thousands Actual Estimate Delta New Old Delta New Old Delta New Old DeltaRevenues 13,232 8,966 4,266 36,852 32,178 4,674 61,204 60,388 816 96,359 95,543 816

MEC 3,095 3,147 -52 9,787 9,839 -52 14,418 14,418 0 24,252 24,252 0Cyclean 9,160 5,250 3,910 24,194 2 0,284 3,910 43,915 43,915 0 69,236 6 9,236 0FGC/Other 977 569 408 2,871 2,055 816 2,871 2,055 816 2,871 2,055 816

COGS -6,078 -2,384 -3,694 -12,463 -8,428 -4,035 -15,162 -14,550 -612 -23,804 -23,192 -612MEC -1,955 -1,646 -309 -5,966 -5,656 -309 -10,813 -10,813 0 -18,189 -18,189 0

Cyclean -3,487 -263 -3,225 -4,285 -1,061 -3,225 -2,196 -2,196 0 -3,462 -3,462 0FGC/Other -636 -476 -160 -2,212 -1,711 -501 -2,153 -1,541 -612 -2,153 -1,541 -612

Gross Margin 7,154 6,582 572 24,389 23,750 639 46,042 45,838 204 72,555 72,351 204

MEC 1,140 1,501 -361 3,822 4,183 -361 3,604 3,604 0 6,063 6,063 0Margin% 37% 48% 39% 43% 25% 25% 25% 25%

Cyclean 5,673 4,988 686 19,909 19,224 686 41,720 41,720 0 65,774 65,774 0Margin% 62% 95% 82% 95% 95% 95% 95% 95%

FGC/Other 341 93 248 659 344 315 718 514 204 718 514 204Margin% 35% 16% 23% 17% 25% 25% 25% 25%

Other Operating Costs - 3,438 -4,722 1,284 -18,736 -20,804 2,068 -11,922 -14,834 2,912 -12,944 -16,173 3,229

Equity in Earnings - ACS -2,050 -1,752 -298 -7,811 -7,215 -596 0 0 0 0 0 0MI/NexGen for Refined Coal -3,053 -3,750 697 -9,615 -10,312 697 -26,458 -26,458 0 -39,118 -39,118 0

Net Cyclean Contribution 2,620 1,238 1,383 10,294 8,912 1,383 15,262 15,262 0 26,656 26,656 0

EBITDA -1,387 -3,642 2,255 -11,773 -14,581 2,808 12,162 9,046 3,116 24,993 21,560 3,433

Margin % -10% -41% -32% -45% 20% 15% 26% 23%

One Time Items 0 0 0 0 0 0 0 0 0 0 0 0

Net Income -3,811 -2,426 -1,385 -49,944 -49,727 -216 4,168 2,262 1,906 11,716 9,650 2,066

EPS -$0.50 -$0.32 -$0.18 -$6.76 -$6.73 -$0.03 $0.43 $0.23 $0.20 $1.22 $1.00 $0.21

Source: Avondale Partners, Company Filings

Company Description

Headquartered in Littleton, CO, ADA-ES (ADES) is a leading provider of mercury emissions control technologyand combustion optimization products to coal-fired power plants. Coal is the leading fuel source for energy in

the US, and recent emissions legislation has required companies to address emissions during the coal-burningprocess. ADES offers solutions to limit mercury emissions as well as improve operating efficiency of coalboilers.

Investment Thesis

We remain cautious on ADES shares given the risk/reward around the Norit judgment and uncertainties aboutthe business prospects. The company's refined coal joint venture (CyClean) represents a lucrative near-termopportunity, and ADES has shifted its focus to this business until a Federal mercury rule justifies an increase inAC supply. With the extension of the in-service through YE 2011, ADES has an opportunity to enlist additionalcustomers and meaningfully drive earnings.

ADES provides Mercury Emissions Control solutions to utilities with coal-fired boilers and is working to

capitalize on the increasing amount of mercury regulations in the US. There are over 1,100 coal-fired boilers inthe US, and less than 50% contain some form of mercury control. At this point, ADES' holds only a minorityinterest in the AC plant (24%) and profitability is unlikely until compliance with the Federal MACT rule drawscloser (2014).

Price Target Justification

We reach our $14 Price Target based on an NPV analysis of ADES reaching 32 mm tons of refined coal salesannually (discounted at a 5% aftertax rate), net of the preferred interest and reduced by the value of the Noritarbitration and royalty. We assume the company's entire ownership position in the ADA-CS AC joint venture

ADA-ES, Inc. - November 10, 2011 Avondale Partners, LL



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is reduced to compensate the JV for legal expenses and that enhanced coal and emissions control sales serveto cover SG&A costs.

Potential Catalysts

Onset of Mercury Emissions Regulations - ADES, as a market leader in mercury controls, would bea prime beneficiary of timely implementation mercury emissions regulations, such as the Federal UtilityMACT.

Sale of CyClean Solution - ADES' prime opportunity is its joint venture to produce and market a refinedcoal product (CyClean) specifically designed for cyclone boilers. It has qualified CyClean for the Section45 tax credits, and if it can line up more buyers, it appears to be a lucrative project for ADES.

Incremental Pollution Control Solutions, Particularly CO2 - With its CyClean joint venture, ADES isentering the realm of control solutions for other pollutants, and the growing market for emissions controldevices presents incremental opportunities for other pollutants. CO2 in particular is receiving significantattention, and a comprehensive national regulation would provide an opportunity for ADES.

Risks

Availability of Capital - While ADES is pursuing an entry into activated carbon production, it will needsignificant capital to construct a manufacturing facility. The company currently has limited float and an

inability to procure capital could slow these efforts.

Competition - ADES is seen as a market leader in ACI mercury controls, but other options are available,some at lower costs. Additionally, solutions aimed at curbing other emissions can also reduce mercury,which adds another layer of competition

Norit Arbitration - ADES received a negative judgment in its legal case with Norit for patent infringementon AC production and will owe Norit nearly $41 mm in awards plus additional royalties on future ACsales from the plant. Unresolved is the question about indemnification to the JV for legal costs and royaltyresponsibility.




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ADA-ES Inc. A

Consolidated Financial Statements D

($ thousands) Full Year Full Year 2010 - Quar ter Ending Full Year 2011 - Quarter Ending - Pr ojections

2008 2009 Mar June Sept Dec 2010 Mar June Sept

Summary Margin Data

Mercury Emission Control Revenues 97% 97% 79% 83% 34% 29% 98% 24% 24% 23% Flue Gas Conditioning and Other Revenues 3% 6% 21% 17% 6% 5% 9% 4% 8% 7% Mercury Emission Control Gross Margin 34% 39% 41% 25% 48% 33% 38% 59% 44% 37% Flue Gas Conditioning and Other Gross Margin -2% -2% 67% 57% 59% 0% 49% 19% 16% 16% Total GM 33% 30% 35% 0% 78% 72% 61% 85% 74% 54%G&A Margin 49% 89% 118% 319% 139% 129% 147% 57% 97% 22%

EBITDA Margin -21% -56% -110% -375% -123% -122% -147% -32% -62% -10% Pretax Margin -22% -72% -115% -299% -124% -118% -136% -27% -65% -35% Effective Tax -43% -39% 36% 36% 37% 35% 30% 621% 51% 17%

Net Margin -31% -44% -73% -192% -78% -35% -71% -325% -32% -29%

Summary Growth Rates (Y/Y)Mercury Emission Control Revenues -12% 5% -36% -67% -42% -22% -40% -34% -44% 93% Flue Gas Conditioning and Other Revenues -67% 174% 943% 338% 19% 17% 75% -57% -29% 190% Total Revenue -16% 23% -21% -60% 58% 140% 12% 119% 82% 583% Total Gross Margin -15% 15% -34% -100% 223% 440% 125% 429% 282% 89325% Cost of Sales -16% 27% -11% -35% -34% -10% -38% -48% -4% 261% EBITDA 1194% 222% 477% 887% 274% 34% 193% -36% 3% -81%

Net Income -2128% 76% 418% 582% 257% -41% 79% 877% -20% 3% EPS (excluding Special Items) -1631% 99% 395% 113% 3% 131% 64% 824% -41% -36%

Summary Growth Rates (Sequential)

Mercury Emission Control Revenues -23% -48% 59% 2% -22% -16% 81% Flue Gas Conditioning and Other Revenues 153% -58% 39% 0% -25% 64% 72% Total Revenue -41% -50% 288% 19% -6% -17% 88%Cost of Sales -9% -23% -13% 48% -48% 43% 228%EBITDA 79% 71% 27% 19% -75% 61% -68%

Net Income 120% 32% 57% -46% 784% -92% 69%Source: Company Reports and Avondale Partners

DA-ES, Inc. - November 10, 2011



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Important DisclosuresAvondale Partners, LLC makes a market in the securities and/or ADRs of ADA-ES, Inc. (ADES).

Avondale Partners, LLC and/or its affiliates, their individual officers, directors, members or employees (excluding the analyst primarily

responsible for this report) and/or members of their families, may make purchases and/or sales as principal or agent in the subject

securities. The analysts responsible for the preparation of this report may receive compensation which is derived, in part, from the overall

investment banking revenues received by Avondale Partners. Such analysts are not permitted to receive compensation directly from

investment banking fees paid by the subject company.

Each Avondale Partners research analyst named on the front page of this research report, hereby certifies that (i) the recommendations

and opinions expressed herein accurately reflect the analyst's personal views about the company and the securities that are the subject of this report and (ii) no part of the analyst's compensation was, or will be, directly or indirectly, related to the specific recommendations

or view expressed by the analyst in this report.

Price Target Valuation Method and Risk Factors: The 12 month price target is based on the analyst's assessment of future earnings

and cash flow, comparable company valuations, and growth prospects. Risks to the target include broader market and macroeconomic

fluctuations, as well as unforeseen changes in the company's fundamentals, business trends, competition, and/or unexpected management

changes. Additional disclosures are available by calling 866-699-3531.

Rating Definitions

MO: Expected price gains of at least 5-10% greater than the market over the next 6-18 mos.

MP: Expected price gains similar to the market over the next 6-18 mos.

MU: Expected price gains of at least 5% less than the market over the next 6-18 mos.

Investment�Banking�Serv./Past�12�Mos.

Rating Count Percent Count Percent

BUY�[MO] 116 68.20 4 3.45

HOLD�[MP] 52 30.60 0 0.00

SELL�[MU] 2 1.20 0 0.00

Other DisclosuresThe material herein is based on sources that we consider reliable, but it is not guaranteed to be accurate or complete. It is published for

informational purposes only and should not be construed as an offer, or the solicitation of an offer to buy or sell any security. Prices

and opinions expressed herein are subject to change without notice, and Avondale Partners is under no obligation to update or keep the

information current. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors.




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BANKING 866.699.3530 *** SALES 866.386.7474 *** TRADING 866.386.7475 *** RESEARCH 866.699.3531

Nashville Main 615.467.3500 3102 West End Avenue, Ste 1100, Nashville, TN 37203

Investment Banking 866.699.3530 3102 West End Avenue, Ste 750, Nashville, TN 37203

Baltimore 866.401.5741 601 East Pratt St., Ste 321, Baltimore, MD 21202

Boston 866.326.9365 184 High St, Suite 702, Boston, MA 02110

Chicago 866.386.7474 180 N. LaSalle Street, Suite 3700, Chicago, IL 60601

Kansas City 866.699.3531 8014 State Line Road, Suite 202, Prairie Village, KS 66208

New Jersey 866.699.3531 2 Sheppard Road, Voorhees, NJ 08043

Philadelphia 610.727.3878 1055 Westlakes Dr., Suite 300, Berwyn, PA 19312

St. Louis 866.699.3531 3 City Place Drive, Suite 1060, Creve Coeur, MO 63141


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