During the third quarter, the U.S. Senate introduced a bipartisan legislative solution to the disposal of fly ash, including a federal standard that would be administered by the states, but that bill is stalled right now, said coal ash recycler Headwaters Inc. (NYSE: HW) in its Nov. 6 earnings statement for its fiscal (July-September) fourth quarter.
The Senate bill has 12 Democrat and 14 Republican co-sponsors, indicating that it would likely have 60 senators supporting the legislation when it comes up for a vote, Headwaters noted. The House version of the Senate bill was passed with a strong bipartisan majority earlier in the year. “It is now important to identify a legislative vehicle to which the fly ash disposal language can be attached, providing Congress an opportunity to resolve the regulatory uncertainty caused by the EPA in a bipartisan, environmentally sound manner,” Headwaters added.
As part of its response to litigation initiated by environmental organizations, the U.S. Environmental Protection Agency has formally stated that it requires more time to evaluate proposed fly ash disposal regulations, Headwaters noted. In a recent court filing, the EPA indicated that it does not expect to propose final regulations until 2014, at the earliest. “Based on the timetable set by the EPA, we do not anticipate any significant developments in the near term, unless action is required by the courts,” Headwaters said.
Also, the EPA has not completed its risk evaluation methodology for encapsulated beneficial use of fly ash. “When the risk evaluation methodology is complete, we believe that the EPA may apply it to fly ash concrete and synthetic gypsum wallboard, two examples of encapsulated products, confirming the historical consensus that there is no environmental exposure associated with the use of coal combustion products in these applications,” said Headwaters.
Headwaters Resources is the largest domestic manager and marketer of coal combustion products (CCPs), including fly ash. Fiscal fourth quarter 2012 revenues in the heavy construction materials segment, which includes the ash disposal operations, increased by 12% to $92.6m, compared to $82.6m for 2011. “We experienced revenue growth in both CCP sales and in CCP services provided to utilities, as incremental revenue from new projects more than offset the effect of unplanned outages and lower electricity demand,” the company said. “Revenue increases were particularly strong in the central region of the country. CCP service revenue represented approximately 28% of total revenue for both the fourth quarter of 2012 and for the year.”
For the year, heavy construction materials revenue increased $28.4m or 11% compared to 2011. Operating income increased 28% from $31.3m to $40.2m, and Adjusted EBITDA grew by 19% to $54.8m. Passage of the highway bill in the quarter, and increases in new residential construction, should provide the heavy construction materials segment the opportunity for continuing its solid performance into 2013, Headwaters said.
Discontinued coal cleaning operations sustain a loss
The loss from discontinued operations for the fourth quarter of 2012 was $7.9m, which included $6m of accruals and other non-cash charges. Exclusive of the non-cash charges, the quarterly loss from discontinued operations was $1.9m in the fourth fiscal quarter of 2012, compared to a total loss of over $9m for the first three quarters of the year. Those discontinued operations include coal cleaning plants scattered around the country in states like Alabama that process waste coal into usable material.
“We continue to negotiate with prospective purchasers of the coal cleaning facilities and currently expect to sell all, or substantially all, of our discontinued coal cleaning business before the end of calendar 2012,” Headwaters said. “In fiscal 2012, we sold one of our coal cleaning facilities, and on October 31, 2012, we closed on the sale of two additional facilities. Since the facilities sold in October will have to be relocated, proceeds from the sale are largely through royalties related to future production. The remaining eight facilities are under contract, but there are material conditions that must be met in order for the transactions to close.”
The U.S. Mine Safety and Health Administration database shows 10 of these operations as controlled by Headwaters, with one in Utah, five in Alabama, one in Indiana, two in Kentucky and one in West Virginia. Out of those, three are listed by MSHA as abandoned, two as temporarily idled, two as nonproducing and three as active. The active operations are Covol Engineered Fuels in Utah, Covol Fuels Alabama No. 4 in Alabama and Chinook in Indiana.