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Executives

Tricia Ross – IR, Financial Profiles

Sharon Madden – VP, IR

Kirk Benson – Chairman and CEO

Steve Stewart – CFO

Jack Lawless – President, Construction Materials

Bill Gehrmann – President, Resources

Analysts

John Quealy – Canaccord Genuity

Zach Larkin – Stephens Inc

Al Kaschalk – Wedbush Morgan Securities

Ed McCabe – Clean Value Partners

Dan Mannes – Avondale Partners

Esie [ph] – Principal Global Investors

Headwaters, Inc. (HW) F4Q2010 (Qtr End 09/30/10) Earnings Conference Call November 2, 2010 11:00 AM ET

Operator

Good morning. My name is Sarah and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Headwaters Incorporated fourth quarter and fiscal year 2010 conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions). Thank you. I would now like to turn the call over to Ms. Tricia Ross. You may now begin.

Tricia Ross

Hello and good morning. Thank you for joining us for the Headwaters Incorporated fourth quarter and fiscal year-end 2010 conference call. You should have all received a copy of today’s press release that was released before market opened this morning. If you have not yet received it, please call my office at 310-478-2700 or email tross@finprofiles.com and we will get a copy right away.

Without delay, I would now like to introduce Headwaters Vice President of Investor Relations, Sharon Madden.

Sharon Madden

Thank you Tricia. Good morning everyone and thank you for joining us today for fourth quarter and fiscal 2010 results.

The call today will be conducted by Kirk Benson, Headwaters Chairman and Chief Executive Officer, and Steve Stewart, Headwaters Chief Financial Officer. Also joining us are Bill Gehrmann, President of Headwaters Resources, and Jack Lawless, President of Headwaters Construction Materials.

As always before we get started, please keep in mind that certain statements made during this call, including statements related to our expected future business and financial performance maybe considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 both as amended.

Forward-looking statements by their very nature address matters that are to different degrees uncertain. These uncertainties which are described in more detail in the annual and quarterly reports filed with the SEC, may cause our actual future results to be materially different than those expressed in our forward-looking statements, whether as a result of new information, future events or otherwise, except as maybe required by law.

You may find Headwaters Annual Report on Form 10-K, our Quarterly Report on Form 10-Q and other SEC filings readily available from the SEC’s website, Headwaters website or directly from the company.

I will now like to turn the call over to Kirk Benson.

Kirk Benson

Thank you very much Sharon and thank you for everyone for your attendance Headwaters year-end conference call. I’d like to begin by making some overall comments on our year from slide two. Steve Stewart, will then comment on the financials followed by Bill and Jack to discuss their operations.

Our revenue declined for the year by 1.8%, the decline occurred in the first half of the year. Revenue for the first half of the year dropped $36 million compared to 2009. Our revenue in the second half increased $24.1 million compared to 2009 or 7%. We’ve entered into a phase of revenue stability for sure.

All of our operating metrics improved compared to 2009. Growth profit was up by $16.8 million, operating income before the impairment charge improved by $21.9 million, and adjusted EBITDA increased by $19.3 million. Adjusted EBITDA was $400,000 above our forecast of $95 million. During the year, we were able to improve our financial position and reduce risk. We accomplished four actions to reduce risk. We refinanced our senior debt, eliminated EBITDA maintenance covenants. We don’t have any material debt due until 2014. We repaid $29 million of our senior subordinated 16% notes reducing recurring interest expense by $4.6 million and increasing our adjusted EBITDA interest coverage to almost two times.

We nurtured our cash balance, reduced CapEx, maximized tax refunds, sold our interests in our hydrogen peroxide plant and even with repayment of $29 million in debt, we ended with the year with $91 million in cash. We are in a position to continue to reduce debt. The combination of reducing debt, increasing EBITDA and preserving cash resulted in a reduction of our net debt-to-EBITDA ratio from over five times to approximately four times.

So I’d now like to turn the time over to Steve Stewart to review our financial results.

Steve Stewart

Good morning everybody and thank you Kirk. Before I discuss the slide and some of my comments, I want to mention that we expect to file our Form 10-K around November the 19th.. The comments that I’m going to provide here were taken primarily from the slides which you can see. That were sent out this morning and to a lesser extent from the condensed consolidated balance sheet and statements of operations that were attached to the press release.

During 2010, we had indicated that both our light building products and heavy construction materials businesses had shown signs of stabilization, even in light of the continued weakness in new housing and residential remodeling markets and a noticeable slowdown in the commercial construction and infrastructure activities, that directly impacts our fly ash operations.

These indications continue to be confirmed when you look at our operating result for the fourth quarter and for the year that ended September 30. Revenue for fiscal 2010 was only down 1.8% as Kirk mentioned. However the September quarter increased 3.8% when compared to the same 2009 quarter. Even more significant thing to me was that the fourth quarter revenues increased to 2.6% and 11.4% increases in consolidated gross profit for the September quarter and for the fiscal 2010 year-end.

We continue to realize the benefits of the operational improvements in the cost reduction programs that we have been actively working on for the last 12 – 24 months. Gross profit for the consolidated group, was an excess of 26% in both the June and September 2010 quarters which is within 6 percentage points of the best gross profit performance we experienced in 2006, although our revenues are down by almost 25%.

During fiscal 2010, we began tracking our contribution margin in addition to the traditional GAAP measurements. Headwaters has a contribution margin which is revenues less variable cash operating expenses just slightly below 50%. As revenues increase in the future, this high contribution margin will have a significant impact on Headwaters gross margin and operating income performance.

Headwaters has a relatively large amount of debt issuance costs and debt discounts that are amortized through interest expense in our statement of operations. Accordingly, recurring cash interest is much lower than the interest expense reflected in our statements. Cash interest for fiscal 2010 was approximately $50.6 million if you exclude approximately $5 million of debt redemption premiums that we incurred when we redeemed some of our convertible debt.

However total expense on the statement of operations shows a $71.6 million. Cash interest expense for fiscal 2011 is expected to be around $47 million. Total operating expenses excluding the asset impairment charges, decreased by $5.1 million or 3.4% when you compare fiscal 2010 with 2009. This again reflects results of our operational improvement and cost reduction programs.

Headwaters effective income tax rate for fiscal 2010 approximates a statutory rate. Headwaters has utilized its 2009 and prior income tax losses by carrying these losses back to prior years, amending those returns and receiving income tax refunds. The 2010 loss and the tax credit carry forwards are offset by Headwaters existing deferred income tax liabilities resulting in a net zero deferred tax position. Accordingly in 2011, Headwaters will have a full valuation on its net deferred tax assets and I would expect that Headwaters effective income tax rate will be close to zero.

We significantly strengthened our balance sheet during fiscal 2010 with our debt refinancing and debt retirements during the year. We have no material debt maturities until 2014, and we ended our fiscal 2010 year with over $90 million of cash on our balance sheet. Slide four shows, our net debt-to-adjusted-EBITDA ratio improved by over 25% to $4.07 million compared to $5.52 million at the beginning of the year.

We currently have a $70 million asset based revolving credit facility with over $61 million of availability. This provides Headwaters with over $150 million of liquidity at September 30, 2010. We made an interest payment of approximately $19 million today in connection with our senior secured notes that reduces this liquidity amount. Our trailing 12-month adjusted EBITDA improved by 25% to $95.4 million at September 30, 2010 compared to $76.1 million at September 30, 2009.

During fiscal 2011, we will continue to look for opportunities to retire additional debt. As we reduce our leverage either through reducing debt, or increasing our EBITDA, this should have a significant positive impact on our valuation multiple as our risk profile improves.

We significantly reduced our capital expenditures during the year from $64.2 million during fiscal 2009 to $25.3 million in fiscal 2010. We expect total capital expenditures for fiscal 2011 to be at levels comparable to fiscal 2010.

Finally, slide 10 shows quarterly revenues and adjusted EBITDA for fiscal 2009 and fiscal 2010. As you can see, we have had positive year-over-year adjusted EBITDA comparisons now for four consecutive quarters. This again demonstrates the impact of our operational improvement and cost reduction initiatives. And we are hopeful that this will continue as we move out of this recession.

I’d like to turn the call over now to Jack Lawless to go over our light building products.

Jack Lawless

Thanks Steve, and good morning, everyone. Revenues from our light building product segment in the September 2010 quarter were $89.3 million, a decrease of $2.1 million compared to the September 2009 quarter, primarily the result of lower sales from our block product group whose sales fell $4.3 million in that quarter. Despite the modest decrease in sales in the quarter, our operating and EBITDA margin expanded by 17% and 11% respective in the quarter.

Our sales in the second half of the year improved as our national end markets stabilized. Our revenue in the light building product segment declined in the first half of the year by $24.1 million, but grew in the second half of the year by $0.3 million.

Overall sales for the year declined to $216.9 million, a reduction of 7%. However, due to efficiencies and costs improvements throughout all of our businesses, we reported materially better earnings.

For the year, operating income without the 2009 goodwill impairment increased from $3 million to $17.2 million, while adjusted EBITDA increased 15% to $52.3 million.

Slide seven shows how revenue stabilized as we went through fiscal 2010 and the material improvement in EBITDA in the second half of the year.

Our architectural stone product category had solid sales momentum in the second half of the year, increasing its sales by 9% and more than doubling its EBITDA from year-ago levels. We had nice sales improvements in most of our regions around the country and our new outdoor living program continued to gain traction in the market.

Our operating results were positively impacted from the many improvements that we made in the business over the past 18 months, which amplified the gain we enjoyed on our top line sales.

In our siting accessories category, our sales increased by over 5% in the second half of the year as the decline in our end markets moderated. The strongest areas in the country for this segment were the Northeast and Mid-Atlantic regions that saw its combined sales increase over 10% for the year. In addition, our sales were also supported by the strong results of our specialty siting and trim product line which increased its sales by over 16% from fiscal 2010.

For the year, our resin based product sales increased less than 1%. However, due to major improvements in our cost structure, the reported fiscal 2010 EBITDA increased by just under 26%.

Our block category end of the year with revenue falling about 22%. However, our management team did a great job of adapting to its sales environment by slashing SG&A by over 10% and increasing the efficiencies of its plans. In the end, reported fiscal 2010 EBITDA for the year, fell only $2.2 million from its record results in fiscal 2010.

As I have mentioned in previous calls, we have spent a great deal of time improving all the cost structures of our businesses. The results have been tangible. Our operating metrics continued to improve despite headwinds on top line sales. We are cautiously optimistic that the modest momentum that we experienced in the second half of the year will continue into 2011, and that our revamped cost structures should continue to pay dividends as we go through 2011.

Now, I’ll turn the presentation over to Bill for slide eight.

Bill Gehrmann

Thanks Jack, and good morning, everybody. Our coal combustion products group completed the year with revenue of $258.3 million, a decrease of 1% from 2009. Revenue for the September 2010 quarter was $84.7 million, a year-over-year increase of $3.5 million, and revenue was up 7% over the last half of the year.

While product revenues were slightly up year-over-year for the September quarter, overall product revenues for the year decreased by 6%. Product revenues continued to be impact in the three largest cement consuming regions of the United States, with the largest weaknesses coming from California, Arizona, and the Nevada market.

Headwaters Resources provide site service to many of its utility clients. These services include constructing and managing landfill operations, operating and maintaining material handling systems and equipment maintenance. While these services typically have lower margins in our products, they’re not a seasonal and are not as impacted by declines in construction spending.

Site service revenue for the overall year was up 13%, and for the September quarter was up just over 5% on a year-over-year basis. We are completing the construction of the landfill and material handling equipment for Prairie State Generating Company. When this land is in full commercial operation, it will become one of our largest size services operations.

Slide nine shows some quarterly trends for fiscal 2010. Gross profit for the year was $65.5 million compared to $74.9 million for 2009. Gross profit for the September quarter was $25 million compared to $25.1 million for the September 2009 quarter. Adjusted EBITDA for the September quarter was $20.4 million versus an EBITDA of $21.9 million for the September 2009 quarter.

Adjusted EBITDA for the year was $51.4 million compared to $60.4 million for 2009. Margins were lower primarily for three reasons; lower overall products sales, shift of geographic mix and product sales away from California which were higher margin sales and an increase in our lower margin service revenue.

Slide 10 provides a summary of the proposed EPA regulatory change. As we discussed in our last call, in May, the EPA released the draft proposal that was submitted for public comment in June. The original 90-day common period was extended 60 days and the deadline is now November 19th. The EPA also held a public hearings in conjunction with the public common period.

While the EPA continues to indicate that they support the beneficial use of coal combustion products, because of the significant environmental benefit, including reductions in greenhouse gas emissions, they’re also concerned about the safety of landfills after the brief of the wetting impoundment embankment in Tennessee in 2008. This proposal outruns broad potential regulatory approaches for the disposals of coal combustion products.

One approach is a Subtitle C designation for disposal classification coal combustion residuals a special way. This would provide the EPA with jurisdiction over the management of coal combustion product. The other approach is the Subtitle D designation which means that coal combustion residuals would be managed under the same guidelines as solid in industrial waste. Under this approach, individual state put out jurisdiction for disposal regulations under Subtitle D.

The engineering standards for landfills are essentially the same under both approaches. Wetting impoundment like the one in Tennessee will essentially be phased out under either approach. The beneficial use of coal combustion products remains exempt from regulation under both approaches. Under either approach, to increase regulations for disposal are likely to increase the opportunities for Headwaters Resources, utility services group.

After the public common period, the EPA will go back to the O&B with a final proposed regulation. The EPA is under no legislative or jurisdictional deadlines in the publication of the final rule may come months and years after the end of the public common period. Litigation over the final rule will likely delay enactment for several years.

And now, I’ll talk about our coal cleaning business starting on slide 11. Revenues for our coal cleaning business were $56.4 million, down 3% year-over-year. Revenues for the September 2010 quarter were $16.9 million, compared to a $11.5 million for the September 2009 quarter. Revenues for the year on metallurgical coal sales for $18.8 million, an increase of a 144% over last year. The average revenue per ton for the non-coaling coal in the September 2010 quarter was $35, and for the year was $36 per ton.

Slide 12 provides some strategic highlights. We’re continuing to focus our sales efforts on the metallurgical coal market at all of the plants that have access to reserve the neat metallurgical coal specifications. We also continued to low our ASH contents in order to improve in quality and increase value.

We’ve received the permits at our Pinnacle plant that will allow us to expand our production capabilities, allowing for more value into the metallurgical market. The work required for this production expansion will begin in the next month. We also feel that we can continue to increase the value of our metallurgical coal products that are being blended with the coal being produced our site host.

On the steam coal side of the business, we continued to reduce our cost structure. We are managing production to sales in order to manage inventory. We continue to look for opportunities to introduce new utility customers to our refined coal, so that we are positioned when the market for steam coal rebounds. We also continued work to qualify our refined coal sales for Section 45 tax credits.

While the domestic steam coal market remains soft, we anticipate that the continued acceptance of our refined coal in the thermal markets will recreate additional sales opportunities. Our increased focus on the metallurgical coal market and our efforts to improve quality and blend with other high-quality metallurgical coal will continue to increase the acceptance in value our met products.

These efforts in the steam and metallurgical markets, combined with our continued focus on our overall cost structure make us optimistic that we will continue to see corresponding improvements in our operating income in 2011.

Finally, I would like to draw your attention on slide 13 to the change in adjusted EBITDA between 2009 and 2010. Adjusted EBITDA for the year including tax credits was $1.2 million compared to an adjusted EBITDA loss of $7.2 million for the prior year. Adjusted EBITDA for the September quarter was $1.1 million compared to an EBITDA loss of $2.2 million for the September 2009 quarter.

Kirk will now complete the presentation starting on slide 14.

Kirk Benson

Thanks Bill. While we remain committed to separating from the energy part of our business, we clearly made a lot of progress during the fiscal year creating value and positioning us for a separation.

As you heard Bill report, coal cleaning moves to a positive EBITDA position. As many of you are aware, we have been working for a number of years to successfully commercialize our heavy oil upgrading technology HCAT . We can finally report to you some measure of success.

Neste, which is the Finnish national oil company participated with us in the bottom of the barrel international oil conference in London, and Neste reported the success of HCAT. Refineries have proven to be very risk adverse and the development has taken much longer than we originally anticipated.

However, the market potential remains positive with over 500,000 barrels per day of bottoms material processed at 11 refineries around the world. It is our view that we should be able to market our catalyst at a price grade of a $1 per barrel. Sales of the December quarter are on track with the expectations and we anticipate performance in 2011, close to breakeven in this product line.

As you can see on slide 15, there is a fairly dramatic improvement in the energy’s segment across the board. Revenue was up for the year particularly in the last two quarters, EBITDA was strong in the third quarter, but up overall for the year.

I’d like to now turn the call back over to the operator and open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of John Quealy from Canaccord Genuity. Your line is open.

John Quealy – Canaccord Genuity

Hi, good morning, folks. Do you hear me?

Kirk Benson

Yes, good morning, John.

John Quealy – Canaccord Genuity

A couple of quick questions here. First on the flay ash business, I think if you look at Q4, EBITDA were about 24% down a little bit, and Bill went over the reasons for why margins were down. What sort of levels do you think from an EBITDA perspective that flay ash can achieve next year given some of the context Bill provided?

Kirk Benson

Generally, I think that the EBITDA margins in 2011 will end up being a little bit stronger than what they were in 2010. And we are anticipating some margin expansion in 2011. And we feel – actually we feel pretty good about that possibility. Bill has done a good job taking cost out of this system. And as revenue and private sales particularly starts to stabilize and improve a little bit, then I think you’ll see some large expansions. Bill, why don’t you add something to that?

Bill Gehrmann

Sure. As Kirk’s talked, the guys have done a great job in our cost structure. Based on the PCA forecast for 2011 which we’ve already started to see an uptick in cement consumption, we expect product revenue to follow that same trend. So John, that obviously helps us on the EBITDA margins.

Then you just have to balance it. Obviously we have a very focused effort on our utility services work. And as we’ve shared on the last several calls, the margins for that work aren’t quite as strong as the product revenues. And so how that blend works out, it’s a little early to tell. But we fully expect to continue to increase that service revenue. But on the other side, we do expect product revenues to improve next year too.

John Quealy – Canaccord Genuity

And if I can ask on the service revenue side, Bill, you mentioned the proposed regulations of Subtitles C or D moving away from white pawns. In fact, we saw our large coal burner Duke last week announced that they’re going to close their wetting impoundment and go to dry. Can you comment on the addressable market opportunity or how you folks are planning to attack the market? I know you partnered it up with an engineering company a couple of quarters back. But can you give us an update on what we should look for there?

Bill Gehrmann

Sure. Yes, as we’ve talked about we’ve partnered up on one engineering company. We’ve got relationships with others. When they – when these utilities start closing wetting impoundments such as Duke has announced, and TVA is obviously moving in a similar direction, that creates construction opportunities, landfill opportunities.

Typically there is not a lot of work involved for outside contractors in wetting impoundments based on the fact that the materials just can bade with water. So they’re estimates out there now that over the next five years, regardless of Subtitle D or Subtitle C, there is opportunities of potentially $5 to $7 billion in this space on transitioning from wetting impoundments to dry landfills in the construction of the aerospace required to accommodate the product that currently is going into wetting impoundment.

Kirk Benson

One rather small point on this subject is that the Prairie States service contract as Bill mentioned in this script is a pretty large contract for us and it will become the largest service contract that we have. We’re finishing up some of the construction of the disposal site there and there could be a gap of a quarter or two quarters in revenue relating to Prairie States as they transition from building their facility to operating their facility. That could cause us a little bit of the – of a gap in revenue from Prairie States as they go through that transition from construction to operation. It’s not a big deal, but I think it’s worth mentioning, because you may see that in the 12/31 to 3/31 quarters.

John Quealy – Canaccord Genuity

And my last two questions, first, on the light duty building products side, with the business up in architectural stone and accessories, do you know in terms of the end markets where it’s going, whether it’s new houses, remodels, non-residential and do you think any foreclosure –changes in the foreclosure market with what’s going on right now with a bit of a stalemate there, is that changing volumes at all materially?

Kirk Benson

That – it’s a good question. I think the bulk of what we’ve seen from an increased perspective over the last six months or so has come from the remodeling side of the business. And clearly new construction is up a little bit right from a year-ago, but still way down. The foreclosure market interestingly enough, it really helps the remodeling side of the businesses as those come out of foreclosure and get purchased. They need – generally those houses need some type of improvements on them or soon after the purchase and we’ve seen our products being used on those more quite often. So that’s – the remodeling side of the business remains relatively good side of the market for us and we expect it to continue to be pretty good for the next six to 12 months.

John Quealy – Canaccord Genuity

And I’m sorry, my last one on ethanol, Kirk you mentioned that volumes might be down or at least contribution on the revenue side might be down? Can you talk about what’s driving that? Thank you.

Kirk Benson

Yes, so the one of the things that, there was a program called REMS [ph] that provided for a credit to wholesalers if they used ethanol. And in effect what we were able to do is sell those REMS credits. And that program expired in, I think at the end of June or the end of July, we had some REMS sales in the 9/30 quarter but it was diminished, and we won’t have those sales in 2011. And that’s the primary driver in the reduced EBITDA from the ethanol plant. So we go to the next question I think, I think John concluded.

Operator

Your next question comes from the line of Steve Sanders from Stephens Inc. Your line is open.

Zach Larkin – Stephens Inc

Hi gentlemen, this is Zack on for Steve. How you’re doing?

Jack Lawless

Doing well.

Zach Larkin – Stephens Inc

Good. Hi just a quick question on the asset impairment. Can you provide us a little more color on which assets were impaired and if you view any additional risks for future impairments down the road?

Steve Stewart

The asset impairment testing that we did is the accounting literature requires us to do it at the lowest level of track the cash flow. So we did it facility by facility. And the $34.5 million related to five facilities. The problem or the cause of the impairment relates to the assumptions that needed to be made in producing the forecasted cash flows. We believe that there is a lot of very positive activity going on with our coal cleaning operations.

Negotiations with Bill and his group relative to some of our contracts to get some modifications there. We have a couple of facilities that people are looking at purchasing from us. So we feel very good about where coal cleaning is at today and we’re it’s going in ‘011. However some of those assumptions that we used in the cash flow forecasts, we did not have outside third-party verification. That made it difficult for someone to get comfortable. So in doing the impairment testing, we had to eliminate several of those key assumptions that we feel very positive about going forward but aren’t really supportable today. That caused the impairment. We hope that this puts possible impairments behind us, but as you know coal prices can fluctuate, so there could be activities in the future that we don’t see today that could cause future impairments.

But just as likely would be some of those assumptions that we made that we didn’t have third-party verification for, we might be successful in executing those over the next few months or the next year that would cause the impairment that we recorded, not to be something that is actually realized. So it could go either direction, but hopefully the majority of the impairment is put behind us at this point in time.

Zach Larkin – Stephens Inc

Okay, thanks for that color. That’s helpful. And then as we’re going into the 4Q and we’ve got the first month behind us, could you give us a sense for order trends and in your expectations going into the 4Q based on the first month’s execution just across all business lines, Kirk?

Kirk Benson

Yes, generally I think what we’ve seen in October is that on a consolidated basis, we had a positive revenue comparison ‘09 to, or excuse ‘10 to ‘011. So the – on a fiscal year basis, so from October of ‘09 compared to October of 2010, we had a positive consolidated comparison on the revenue line. Going into the businesses a bit, the light building products businesses were pretty close to a flat comparable year-over-year. The fly ash business was up year-over-year and the energy was down a little bit year-over-year.

Zach Larkin – Stephens Inc

Okay, thanks very much for the color and congratulations on the quarter.

Kirk Benson

Thank you.

Steve Stewart

Thanks.

Operator

Your next question comes from the line of Al Kaschalk from Wedbush Securities. Your line is open.

Al Kaschalk – Wedbush Morgan Securities

Good morning guys.

Steve Stewart

Good morning Al.

Al Kaschalk – Wedbush Morgan Securities

Kirk, on slide 14 I think you indicated just sort of the turnaround on the energy technology, etcetera. I was wondering as you look at fiscal ‘011, what do we see here for coal cleaning in terms of, or maybe we should refer in terms of the segment, how do you see that in terms of an operating or an EBITDA line contribution or drag to the consolidated numbers in fiscal ‘011. If you could just update us maybe on what’s left there, what you intend in fiscal ‘011 with – in terms of assets?

Kirk Benson

I think – there are three major sets of assets in the segment for 2011. The most important segment is coal cleaning and so we went in fiscal ‘09 from a negative EBITDA to 2010 a positive EBITDA for over $1 million. We expect the EBITDA from the coal cleaning business to continue to improve in 2011. So that EBITDA number should definitely go up in 2011. The second set of assets is represented by the – by primarily by HCAT, although there is some other activities in that HCAT universe, in addition to HCAT.

But the primary asset driver is the HCAT technology. So we feel very comfortable that we’ve got our first commercial customer in place, and Neste was very positive at this oil conference. And the results that are currently being experienced at the Neste refinery are very positive. So for the first time, we actually have some positive news that we can report to the marketplace. We think that that business in 2011 will end up with a slightly negative EBITDA overall There is some things going on that could result in a positive EBITDA, but I think that it’s going to be pretty close to breakeven, it could go positive, it could go negative but relatively close to breakeven EBITDA.

And then the third asset is the ethanol plant and of course we had a very good year in 2010. We will not have as good a year in 2011, nevertheless we believe that there will be positive EBITDA from the ethanol facility in 2011. So if you look at the entire segment, we are expecting a slightly positive EBITDA for the segment in 2011.

Al Kaschalk – Wedbush Morgan Securities

All right. And in terms of the coal cleaning side, are you able to give us some of the trends or what you forecast in terms of volumes for the fiscal ‘011, I mean is the fourth quarter volume level relatively consistent with what you anticipate in each of the next three to four quarters, will be in this business?

Kirk Benson

I think and Bill you can add on to this, but I think generally if you take the fourth quarter volumes, we should do better than as far as the number of tones produced. So that should be a low end of a range for 2011 and we should end up producing and selling more coal for 2011 than annualizing the fourth quarter number. Is that – do you agree with that Bill?

Bill Gehrmann

Yes, that’s right Kirk, and as I had talked about in the narratives, one of the big drivers will be obviously we’re starting to do some work at Pinnacle which will increase that production based on the severity of the winter up there. We anticipate that increase coming on early next year, no later than probably April or May hopefully sooner. That opportunity, that basically increases our ability, it doubles our ability to produce at the Pinnacle site.

As far as last quarter, met coal Alabama as we’ve talked about based on the volume of shipments. It’s a little bit cyclical and so we’ll have larger volumes in one quarter and smaller as we build inventory for ship. But based on our metallurgical coal sales, we anticipate increased volumes next year. Going into this year from a pricing standpoint, we had some long one-year contracts that we entered into late in 2009 that are still in place while basically the metallurgical coal market has gone to more quarterly pricing. When we’re allowed to participate in that we expect some upside in our pricing too.

Al Kaschalk – Wedbush Morgan Securities

Is it fair to say that you’ve contracted a large portion of your intended sales via contracts or is it still sort of…

Bill Gehrmann

We have – through this year we have some – and we’re still some of those are playing out Al, moving forward and we’ll be meeting with our side host where we participate in their move in the product. We’ll be over the next couple of weeks meeting with them in making decisions as these long-term commitments play out. We do have some opportunities to enter into some more annual agreements. But we’ll take a look at what we think that forecast are for the pricing in the markets and determine here over the next month whether it’s more prudent to participate a little more in some of the spot opportunities, rather than locking ourselves into some annual agreements with fixed pricing.

Al Kaschalk – Wedbush Morgan Securities

And then final question is for Jack or direct to that his segment. In terms of the block business, we’re I think we’re now into our second quarter of maybe tougher comps and declining revenues maybe volumes. A, is that correct and B, what’s – is it just a fundamental of such strong past quarters or is there an end-market that’s softened given the nature who this is sold to?

Jack Lawless

Al, I think the carnage is over in that market. I think we’ve been pretty steady 20% down in that business for most of the year with most of it coming in on the infrastructure and commercial side of the business. The retail business held on a little bit better. But with that being said, the business has stabilized quite a bit over the last three to four months, and we expect the severe negative comps to be over. And frankly we’re expecting things to come in next year at or above where we finished this year. And we expect the first and second quarter to be reasonable from a comp perspective.

Al Kaschalk – Wedbush Morgan Securities

Thank you.

Jack Lawless

Yes.

Operator

Your next question comes from the line of Ed McCabe [ph] from Clean Value Partners. Your line is open.

Ed McCabe – Clean Value Partners

Hi everybody, how are you doing?

Kirk Benson

Good morning.

Ed McCabe – Clean Value Partners

Good. I just wanted to touch on the sales, potential sales within the energy business, particularly the coal assets. Could you just give us an update in terms of progress on the data rooms open, interest level kind of characterize the types of buyers, what they look like, what they (inaudible) from, that type of thing?

Kirk Benson

Generally, we’re probably going to be able to sell these facilities on a one-off basis because of the location where you need to have a facility maximized value of the facility. So what we’ve done is we’ve tried to identify folks that are in the coal industry. So the natural buyers of these facilities will be folks that have coal resources that they want processed. We’ve got – we have three facilities that we got interested parties that’s very preliminary but we started the discussions on three of these facilities. The idea being that we’ll be able to maximize the value of the facility if we are able to identify a buyer that has feedstock that they want processed. And so I think that it’s going to take us a while to get this done, but we’re – we’ve had some positive experiences over the last quarter. And we’re starting to identify buyers for these facilities. We’ve got three in which we are having conversations.

Ed McCabe – Clean Value Partners

And if I go back to your financial statements and you guys breakout your CapEx by your different divisions, I can comment tell based on fiscal ‘06, ‘07, ‘08 or something like that, how much capital has gone into these assets. When I think about a minimum valuation or a minimum sales price, is that capital invested kind of the floor below which you walk away or how would you guys thinking about valuation for these assets as you market them?

Kirk Benson

I think Ed, that’s our current perspective is that there is two pieces of value in these facilities. One piece of the value is represented by the net book value, the investment that we’ve made in the facilities. The other value that should be something that we can attain is related to the tax credits. And so in the – in a situation where we can maximize the value facility we’re talking about the net book value, we’re also talking about the value that’s generated from the tax credits that these facilities are qualified for.

Ed McCabe – Clean Value Partners

Okay. And then just one question to clarify something you said earlier Kirk, if the natural buyer is a coal company and it’s at the property of particular coal company. Is that the only natural buyer or because these things I know with a little bit work are mobile, are these facilities relevant to another coal company with other properties where they aren’t currently being used?

Kirk Benson

Yes, they’re definitely relevant to other locations.

Ed McCabe – Clean Value Partners

Okay, so it’s not just one guy – it’s not just that the equipment resides at one place and that the only natural buyer someone else could be on the bidding and could eventually move that equipment to their property?

Kirk Benson

That’s absolutely correct.

Ed McCabe – Clean Value Partners

Okay, thanks very much. I appreciate all the clarifications.

Kirk Benson

Okay.

Operator

Your next question comes from the line of Dan Mannes from Avondale. Your line is open.

Dan Mannes – Avondale Partners

Hi good morning everybody.

Kirk Benson

Good morning.

Dan Mannes – Avondale Partners

A couple of follow-up questions. First for Jack. Can you just walk us through the last, I guess the last couple of quarters, especially as it relates the falling away of the tax credit. Did you ever really seen uptick in new construction business? Was there ever any stocking from a distributor level, or I mean I guess I’m trying to understand, did anything really change or how material it actually was on the business. It seems like it maybe – it sort of came and went the tax credit and it doesn’t seem to do that much for you guys.

Jack Lawless

Yes Dan, I would say that the tax credit had very little visible impact on our P&L or sales. So it had a slight negative impact when it went away, but I think that’s been – the slight negative impact has was probably for a month or so and that’s really about it. I think we’re back to normalcy as we speak now.

Dan Mannes – Avondale Partners

And there was no product stocking or anything like that that happened around it or in front of it.

Jack Lawless

No, in fact it’s been – the industry is really is in a very low inventory level and it’s been that way for a quite some time. So most of the products that we sell have very, very short lead time. So we’re dealing with current demand in any case anyway.

Dan Mannes – Avondale Partners

Got it. That’s helpful. Quickly on the coal business. We were a little bit confused, it looks like sequentially your revenue per time dropped a little bit? And I didn’t hear this addressed on the prepared comments but Bill, if you could explain to us a little bit maybe was there a mix shift or why were prices dropping when met coal price seemed to be pretty firm?

Bill Gehrmann

I think Dan, where that came from I think it’s been pretty stable through our steam coal in our Alabama Q4 versus Q3, probably was driven by changes at Pinnacle.

Dan Mannes – Avondale Partners

You just had less production in Pinnacle or it was the price of Pinnacle?

Bill Gehrmann

Little less production and then price was down.

Dan Mannes – Avondale Partners

And can you remind us again what’s the potential output increase at Pinnacle, because I’m trying to figure out how material that could be in the back part of ‘011?

Bill Gehrmann

We’ve actually based on a permit restriction we’d been operating that plan at roughly 30 – about a third capacity. So conservatively as I said earlier, I think we can double capacity as we make these permit modifications, there are some reclamation work around the impairment that needs to be done, as the activity we hope to be starting within the next month. But with that that should allow us to at least double our monthly production there.

Dan Mannes – Avondale Partners

And any real – any material CapEx numbers to go with that or fairly modest?

Bill Gehrmann

Yes, there are some CapEx numbers in there, actually we’re going to self-perform that work. So that helps a little bit. Actually the CCP group, the utility services group will be performing that work for the coal cleaning group.

Jack Lawless

It isn’t actually CapEx on the facility. It’s just reclamation kind of stuff.

Bill Gehrmann

Right.

Jack Lawless

That Bill is referring to. So it’s mostly dirt work is what it is. But I think the accounting – the way the accounting is going to be done it does get capitalized because basically you’re benefiting the value that’s going to be created from the resource overtime. So you do capitalize it, but it isn’t CapEx in a traditional sense. It doesn’t relate to the equipment or the facility, it relates to moving the dirt around so that we can access the resource.

Dan Mannes – Avondale Partners

Sure, got it. And then just briefly on the way you talked about energy technology and coal cleaning. If you add those two up, it makes it look like the EBITDA was fairly positive in 2010? Are you excluding from that R&D and maybe some SG&A and the energy segment that’s not allocated. I guess I just wanted to make sure adding everything up here when you talk about those two segments in slides, I think 14 and 15 or 13 and 15?

Jack Lawless

Yes, I mean of course R&D expenses are expensed. And so they’re all included in the EBITDA numbers as expensed. So I’m not sure I understand fully that…

Dan Mannes – Avondale Partners

I’m just wondering if there are any costs that are in your energy segments that are not allocated to either of these sub-segments. So I mean can we just add these up and that will go up to your energy numbers or is there anything else there?

Jack Lawless

Well you’ve got one of the things you have to take into account is the sale of hydrogen peroxide facility in South Korea. So you got, I don’t know, I think if you by enlarge if you add up – I referred to as HCAT.

Dan Mannes – Avondale Partners

Right.

Jack Lawless

That’s in this HTI group. If you would take those expenses, the ethanol expenses and the coal cleaning those are the three assets, the three major assets that make up the energy segment.

Dan Mannes – Avondale Partners

Got it. So there are no unallocated costs. So everything in those two slides represents everything that goes into that segment reporting?

Jack Lawless

Yes, I mean the last slides were the segment. That is the segment reporting. So that includes everything in that – it’s like slide 15.

Dan Mannes – Avondale Partners

Got it. Sorry to belabor that, but the final thing I just wanted to bring up, just given your cash position. You guys – your net debt position was down fairly meaningfully in the fourth quarter. It looks like maybe even $60 million or just about a $1 a share. With $90 million of cash over the books and even after the interest payment, talk about the next steps a little bit in terms of what’s left on the 16% and what you’re going to do with the cash because obviously it’s probably more than when you’re going to need for working capital in the near term and your debt is pretty expensive and the cash isn’t earning much?

Jack Lawless

So Steve, do you want to comment on that?

Steve Stewart

Yes, I think Dan we’ll continue to focus on taking out some of the debt as we focused in ‘010 on taking out some of our 16% convertible subordinated debt. We have less than $20 million of that left, and we’ll continue to focus on that, I mean I would like to take all of that out by the end of the year but we get some – we get into some issues relative to tender rules if we’re out there trying to bring in more than 50% of the tranche or debt that exist in the market. So we’ll have to work with our legal group to make sure that we stay within that.

But we’ll definitely look at taking out some additional amounts of the 16% debt. If we’re unable to get as much of that as we would like, I would imagine that we can then go into the open market and wouldn’t plan on going into the open market and seeing if we could just buy some of our senior debt. It trades today at about $104, $105 in the market, but still gives a fairly favorable return to 9%, 9.5% area. So I would imagine that would be next area that we would focus on.

The senior secured debt would preclude us from taking out any of our other subordinated debt other than this 16%.

Dan Mannes – Avondale Partners

Okay, that’s what I was going to ask, so the only thing you can do is you’d either take out the senior secured in the open market or alternatively go after the 16%?

Steve Stewart

That’s correct.

Dan Mannes – Avondale Partners

So you can’t after the 2.5.

Steve Stewart

That’s correct Dan.

Dan Mannes – Avondale Partners

Got it, thank you.

Operator

And your final question comes from the line of Andrew Leinoff [ph] from Principal Global Investors. Your line is open.

Esie – Principal Global Investors

Hi this is Esie. Can you tell me what your net interest expense for the fourth quarter was exclusive of gains and losses due to debt reductions?

Steve Stewart

Let me look here and see if I have that information. I show the total number, but I don’t show the piece that relates to amortization. But I think you could probably take $51 million number, it’s going to be about $12 million. Yes I was going to say $12 million, $12.5 million. Because its nearly about $48 million and so you’re going to see about $12 million this quarter.

Esie – Principal Global Investors

Okay, thank you.

Steve Stewart

Very good. Thank you.

Operator

There are no further questions in the queue. I turn the call back over the presenters for any closing remarks.

Sharon Madden

If there are no further questions, we’ll go ahead and end the call. Thank you for joining us.

Operator

That does conclude today’s conference call. You may now disconnect.

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