Incorporated: 1987 as Cynsulo Inc.
Sales: $119.35 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: HDWR
NAIC: 324199 All Other Petroleum and Coal Products Manufacturing
Through its subsidiaries, Headwaters Incorporated is a leader in both the pre-combustion treatment and the post-combustion treatment of coal. It manages and markets coal combustion products (CCP), or the by-products of burning coal for electricity, on behalf of power plants. The only CCP manager in the United States with national coverage, Headwater makes its revenues by licensing its technology, selling interests in synfuel plants it has developed alone or with partners, and by supplying plants with chemical reagents. It sold more than 59 million pounds of reagents in fiscal 2002.
Headwaters Incorporated can trace its source to Cynsulo Inc., which was incorporated in Nevada in 1987. Cynsulo had a small initial public offering in 1988. Cynsulo changed its name to McParkland Properties Inc. after acquiring McParkland Corp. in December 1988. However, this purchase was rescinded in February 1990. In August of that year, the company became known as Riverbed Enterprises, Inc. At the same time, it shifted its focus to growing alfalfa and other agricultural products.
In July 1991, the company changed its name to Enviro-Fuels Technology, Inc. It had acquired technology for making briquettes from waste particles using binding agents. The company spent the next four years researching briquetting of iron, coal, and coke waste. In 1992, it built a prototype briquetting plant in Price, Utah. To generate cash flow, Enviro-Fuels acquired three construction companies in 1993: Industrial Management and Engineering, Inc., State Incorporated, and Central Industrial Construction, Inc.
The company was known for a time in 1994 as Environmental Technologies Group International. By this time, it was based in Lehi, Utah, south of Salt Lake City. Environmental Technologies acquired Utah’s Larson Limestone Co. in October 1994. Larson was valuable for its rock-pulverizing equipment, which was expected to increase Environmental Technologies’ revenues by as much as $4 million a year.
Environmental Technologies entered an agreement with Geneva Steel Company in May 1995 to build a commercial briquetting plant in Vineyard, Utah. In July 1995, the company licensed its coke-breeze technology to Greystone Environmental Technologies Inc. of Birmingham, Alabama. This process allowed a waste product of coke to be bonded into a solid, useable substitute for coke.
Due to a similarity with another public company’s name, Environmental Technologies changed its name to Covol Technologies Inc. in August 23, 1995, at the same time changing its state of incorporation to Delaware. Concurrent with the decision to focus on commercializing the synfuel technology, Covol began divesting its construction subsidiaries.
Focusing on Coal After 1995
Covol believed developing synthetic fuel from coal fines was its best bet for commercializing this technology. One reason for this strategy was the fact that it enabled the company to take advantage of significant tax benefits. After two Arab oil embargos in a single decade, Congress created a federal synthetic fuels tax credit (Section 29) in 1979 to promote alternative energy production within the United States. This included producing methane from coalbeds and extracting oil from shale or tar sands.
Coal particles less than one-quarter inch in diameter are called “fines.” Covol Technologies developed a process for turning this waste product into solid briquettes or pellets of useable fuel by blending it with low-sulfur coal and baking the moisture out of it (30 minutes at 450 degrees).
Covol agreed to acquire the Wellington Loadout in Carbon County, Utah, from Nevada Electric Investment Co. in November 1995. At least five million tons of low-sulfur coal fines suitable for conversion to briquettes remained at the site.
NASDAQ in 1998
Covol began trading on the NASDAQ exchange in May 1998. By this time, the company had completed 24 synthetic fuel facilities, mostly in Appalachia, Alabama, and the Great Basin area. All were in partnerships, joint ventures, and alliances, rather than outright ownership. This completed the first phase of its business plan.
In July 1998, Brent M. Cook replaced Ray Weiler as chairman of the board. Cook, formerly director of strategic accounts at PacifiCorp Inc., had first joined Covol in June 1996 as chief financial officer and was named president and CEO four months later. After becoming chairman, he remained company CEO but stepped down as president. Kirk Benson became CEO of Covol in April 1999.
Covol reported losses of $74 million between 1987 and 1999. Shares fell by 91 percent in 1999. It faced another difficult year in 2000. A stellar climb was just around the corner, however. Covol had about 50 employees at the time, most of them in research and development.
A New Name in 2000
In 2000, royalty growth increased fivefold as Covol achieved profitability for the first time in its history. Revenues for Covol’s fiscal year, which ended September 30, 2000, were $45.8 million, up from $6.7 million. Most of this came from selling synfuel plants. Recurring revenues were $27.9 million. The company was able to pay down its debt by more than 95 percent. These results, said Covol, validated its technology-to-market business model.
Since synfuel plants had to be in operation by mid-1998 to be eligible for the Section 29 tax credit, their numbers were limited to about 55. The tax credits had become an important commodity in themselves—more valuable than coal itself. Both of these factors drove up the price of Covol’s plants.
Synfuels competed directly with coal. Some of Covol’s competitors drew criticism for secretive and dubious processes of converting coal waste into synfuels. One company was said to merely spray useable coal with a diesel fuel mixture. However, Covol openly described its process in trade journals. Covol sold its proprietary chemical reagent to plants that licensed its technology, a process that involved treating coal wastes with various bonding agents, which, when heated under pressure, changed the molecular structure of the coal—a key requirement of the tax credit legislation.
Covol Technologies, Inc. changed its name to Headwaters Incorporated in September 2000. The name reflected an expanded focus beyond the core synthetic fuels business. Covol used a venture capital approach to acquire minority holdings in new business, which it aimed to integrate with other Covol affiliates.
Around the same time as its name change, Headwaters created a new unit, Kwai Financial Inc., to provide bridge loans to new technology companies in the earliest stages of financing—between the seed capital provided by angels and the subsequent rounds of venture capital funding. Kwai’s area of expertise was in application services, e-commerce, infrastructure services, and networking. Kwai was soon made part of Avintaquin Capital, LLC, which had Headwaters in its portfolio.
Later in 2000, Headwaters consolidated its business operations into a new facility in the Salt Lake City suburb of Draper, Utah. Revenue for the 2001 fiscal year rose 63 percent to $45.5 million. Net income was $21.5 million. Headwaters’ share price rose 383 percent during the 2001 calendar year, reported the Salt Lake Tribune, making it the best-performing stock among Utah’s publicly held companies.
HTI bought in 2001
Headwaters acquired another company with extensive intellectual property rights in August 2001. Hydrocarbon Technologies Inc. (HTI) of Lawrenceville, New Jersey, had developed technology to produce diesel fuel from coal and heavy oil and to make carbon products from used tires and oil. HTI had been owned by its 49 employees and was founded in 1943 as Hydrocarbon Research. The acquisition was potentially worth about $17 million in cash ($1.5 million), stock, and assumption of debt ($1.5 million).
HTI was involved in ventures in China and elsewhere in the world. It was developing leading-edge nano-catalysis technology to reduce the use of precious metals in such applications as catalytic converters for automobiles.
In May 2002, HTI acquired a worldwide license to develop and market a catalytic heavy oil upgrading technology called (HC)3. This helped produce synthetic crude or liquid fuels from bottom of the barrel, bitumen, or heavy oil. It had been developed by the Alberta Research Council Inc. in cooperation with two HTI executives.
In June 2002, HTI agreed to license technology for a $2 billion direct coal liquefaction plant to be built by China’s largest coal company, Shenhua Group Corporation Ltd., in Inner Mongolia. This would make up to 50,000 barrels a day of ultra-clean liquid fuels such as diesel fuel and gasoline from indigenous coal.
We measure our success by the success of our customers.
This deal had been years in the making. The technology was developed under the auspices of the U.S. Department of Energy (DOE) following the 1970s oil crisis. The DOE and other federal agencies helped HTI work out a licensing deal with the Chinese beginning in 1996.
ISG Acquired in 2002
Headwaters’ high stock value helped it make acquisitions during 2001 and 2002, while its acquisition were helping maintain its share price. In July 2002, the company acquired another Salt Lake area business, Industrial Services Group Inc. (ISG), in a deal worth $227 million, including $181 million of debt. ISG was the parent company of ISG Resources, Inc., which marketed the fly ash, bottom ash, and scrubber sludge that were the by-products of coal combustion. Fly ash was being increasingly used as a substitute for cement in concrete and stucco. In Investors Business Daily, Headwaters CEO Kirk Benson compared it to the volcanic ash used by builders in ancient Rome. However, it was only found in 10 percent of U.S. concrete, while it was used in 25 percent of concrete in Europe.
ISG had been formed in 1997 by Steve Creamer and Chip Everest, who acquired a number of coal combustion residue companies after selling their interest in an eastern Utah landfill. Its 2001 revenues were $216 million—four times that of Headwaters—but it had been losing money since 1999. ISG employed about 760 people at dozens of sites across the United States. Its fleet included more than 400 trucks and 1,200 rail-cars. The company had long-term contracts with more than 115 power plants in 35 states.
The ISG buy combined the leader in pre-combustion treatment of coal with the leader in post-combustion treatment. HTI was also experimenting with converting paper, plastics, and wood from municipal landfill waste into fuel.
HTI acquired the license to a new technology for heating or mixing liquids in July 2002. The Shockwave Power Generator (SPG) used controlled cavitation to improve the dispersion of gases in liquids and to increase chemical reaction rates. For HTI, it had applications in heavy oil upgrading and coal liquefaction.
Total Headwaters revenue increased 163 percent in fiscal 2002 to $119.3 million, another record. Income taxes kept the net income down to $24.3 million. The largest growth came in the sales of chemical reagents, which more than tripled to $74.4 million.
Headwaters relocated its headquarters to South Jordan, Utah—another Salt Lake suburb—in January 2003. The company planned to continue to acquire small fly ash companies to enhance its position as the national leader in coal combustion product management. Headwaters controlled about half of the 24 million tons of fly ash that were produced annually in the United States. This reduced the company’s dependence on synfuels. The Section 29 tax credit for synfuels was scheduled to expire in 2007, which would likely make this side of the business unprofitable. However, Congress had extended the program several times since its inception in 1979.
Headwaters also owned proprietary technologies for a number of building products related to fly ash, including aerated concrete, rapid setting concrete, mortars, and stuccos. Some of these uses originated in Europe, which had a much higher utilization of fly ash. Headwaters was aiming to increase its acceptance in the U.S. market through an aggressive sales, marketing, and lobbying program.
Environmental Technologies Group, LLC (50%); Hydrocarbon Technologies, Inc.; Industrial Services Group, Inc.
Progress Energy, Inc.; Lafarge North America, Inc.; Ondeo Nalco Company.
- Cynsulo Inc. is incorporated in Nevada.
- The company is renamed Riverbed Enterprises.
- Riverbed acquires briquette-making technology.
- Riverbed renamed Covol Technologies Inc.
- Covol stock migrates to the NASDAQ Stock Exchange.
- Covol is renamed Headwaters Inc.
- Headwaters acquires HTI.
- Headwaters acquires ISG.
Alva, Marilyn, “A Fortune in Fly Ash? This Company Says So,” Investor’s Business Daily, November 19, 2002, p. 10.
Boehme, Natalie, “Fuel Pellets Are an Energy Find for Company,” State Journal Register (Springfield, 111.), July 14, 1998, p. 16.
“China: Joint Venture Construction Start-Up on Planned $2,000,000,000 Coal Liquefaction Plant Is Tentatively Scheduled to Begin in Early 2003,” WWP—Report on Oil, Gas & Petrochemicals in the Developing World, July 1, 2002.
“Covol in Talks to Sell Fuel Business and Possibly Merge,” New York Times, June 24, 1999.
“Covol Sells Briquette Plant; Gallagher to Finance Utah Unit,” Coal Week, November 25, 1996, p. 3.
“Draper Company Is Focusing on Converting Fuels,” Deseret News (Salt Lake City), June 9, 2002, p. M5.
“Draper Firm Makes $14.5 Million Acquisition,” The Enterprise (Salt Lake City), May 7, 2001, p. 7.
“Environmental Tech Buys Utah Limestone Firm,” Dow Jones News Service, October 26, 1994.
Goodwin, Morgan, “Dealing with the Very Dregs of Steelmaking,” American Metal Market, August 24, 1995, p. 5A.
“Headwaters Inc. Delivering to 2 Relocated Facilities,” Deseret News (Salt Lake City), March 15, 2002, p. B7.
“Headwaters Sells Interest in Original Synfuel Facility,” Deseret News (Salt Lake City), January 8, 2002, p. B6.
“Kenneth Fraily Is Covol Fuels’ New President,” The Enterprise (Salt Lake City), March 10, 2003, p. 3.
Mitchell, Lesley, “China Will Change Coal Into Gasoline Using Draper Company’s Technology,” Salt Lake Tribune, June 19, 2002, p. B4.
Nyden, Paul J., “Tax Break Helps Synthetic Fuels Cut into Market,” Charleston Gazette (WV), February 2000, p. 2B.
——, “Synfuel Tax Credits Continuing to Grow: Although Credits Disrupt Coal Prices, Public Officials Not Stirred to Action,” Charleston Gazette (WV), September 24, 2000, p. 1 A.
——, “IRS Seeks Public Comments on Synfuel Tax Credits,” Charleston Gazette (WV), November 22, 2000, p. 3A.
——, “Synfuels’ Legitimacy at Heart of Probe,” Charleston Gazette (WV), November 26, 2000, p. 1A.
——, “Plants Petition to Keep Tax Credits: Stricter Synfuel Rules Opposed,” Charleston Gazette (WV), December 8, 2000, p. 6A.
——, “West Virginia Synthetic Fuels Firm Outlines Future Risks in Report to SEC,” Charleston Gazette (WV), December 27, 2000.
Oberbeck, Steven, “Utah Publicly Held Stocks Stood Up Well in 2001,” Salt Lake Tribune, January 1, 2002, p. B4.
——, “Headwaters to Buy ISG for $227M,” Salt Lake Tribune, July 17, 2002, p. B4.
Ondrey, Gerald, “Waste-to-Fuel,” Chemical Engineering, October 1, 2001, p. 21.
“Tax Credits Put Fire Under Briquettes; Covol Targets Utilities, Steel Mills,” Coal Week, January 1, 1996, p. 1.
“$216 Million ISG Resources Sold for Cash and Stock to Draper-Based Headwaters,” The Enterprise, July 22, 2002, p. 1.
—Frederick C. Ingram