Fuel Tech Inc.’s net income quadrupled in the fourth quarter, sending its shares soaring more than 10 percent in the morning trading before falling back significantly.

The Warrenville, Ill.-based technology company helps coal-fired power generation become more cost-effective and environmentally sustainable. The company reported a net income of $1.0 million in the fourth quarter, or 4 cents per diluted share, compared with $200,000, or 1 cent per share, in the same year-ago period. Analysts polled by Zacks Investment Research Inc. were expecting 2 cents per diluted share.

Revenue increased 34 percent to $25 million from $18.7 million.

For the full year, Fuel Tech earned $1.8 million, or 7 cents per share, up from a loss of $2.3 million, or 1 cent a share, in the previous year. The company brought in revenue of $81.8 million in 2010, a 15 percent increase from $71.4 million in 2009.

“We finished the year with record annual revenues and strong operating income gains,” said Douglas Bailey, CEO of Fuel Tech.

The increase was driven by better performance in both the Air Pollution Control technology segment and the Fuel Chem technology segment with revenues rising 25 percent and 45 percent in the fourth quarter, respectively, compared with the same period a year ago.

“The two business lines are coming back to more sustainable run-rate levels,” said John Quealy, an analyst at Canaccord Genuity Inc.

Avondale Partners LLC analyst Daniel Mannes sees the improvement in Fuel Tech’s Fuel Chem business as the biggest upside.

Daniel said in spite of signing up new customers, the business hadn’t really been able to grow revenue because existing customers were cutting back on chemical usage.

“This quarter they really showed very strong growth, both sequentially and on a year-over-year basis,” Daniel said. “I think that provides a good deal of support for continued growth going forward.”

The coal-fired power plant industry that Fuel Tech serves is fairly challenged. According to Bailey, most of Fuel Tech’s domestic coal utility customers reduced  coal-fired power generation in favor of more natural gas and alternative energy sources. That is because of the rise in coal prices and environmental regulations.

But Bailey remains optimistic about Fuel Tech’s future.

Bailey said the company is “off to a strong start in 2011,” and Fuel Tech is “well positioned to increase market share” in both the multi-pollutant emissions control and energy efficiency markets.

“With respect to 2011, we believe that revenues and profits will exceed 2010 results,” Bailey added.

According to analyst Quealy, the key catalysts for Fuel Tech’s better performance are environmental regulations. The U.S. Environmental Protection Agency’s proposed Transport Rule is expected to be finalized around July. Internationally, the company is waiting for China to release its 12th Five-Year Plan, which would include plans for pollution-control mechanisms for coal-fired generation.

Last year, Fuel Tech generated one-fifth of its revenue from operations in foreign countries, including China.

“I think the regulatory environment for cleaner coal-fired power plants both in the U.S. and China looks to be becoming clearer, which should result in more orders in their pollution control segment,” Daniel said.

But Daniel also pointed out that the Air Pollution Control business is solely dependent on the enactment and the effectiveness of environmental regulations.

Any significant modification or weakening of environmental regulations could significantly impact Fuel Tech’s financial performance.

The company’s stock closed Thursday at $8.15, up 5 cents, or less than 1 percent.