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Constituent Review
J. Andrew Braswell, Equity Analyst Newbridge Institutional Research Data as of 3-30-07		Quote/News
		Nano Materials

Review
1/4/07- HW announced that it had completed two additional commercial demonstrations of its HCAT™ catalyst technology, which is designed to improve the upgrading of heavy oil into higher-value distillates such as gasoline and diesel fuel. The technology has been deployed in two separate test runs at a commercial heavy oil hydrocracking facility in North America. Consistent with a first test conducted in 2005 at a European refinery, HCAT implementation resulted in an increase in reactor temperature, increased hydrogen uptake and increased liquid volume yield, all of which are indicators of improved residue conversion. HW estimates that, if fully deployed, HCAT could create more than $50B of net present value for the refining industry.

1/16/07- Announced pricing of its convertible notes offering. The $135M in notes due 2014 will pay 2.5% interest, and HW granted the purchasers an additional $25M over-allotment option. The conversion price is approximately $29.48, representing a premium of 27.5% to the closing price on 1/16/07. HW concurrently entered into convertible note hedge and warrant transactions which effectively increase the conversion price of the notes to $35.00. Proceeds from this offering will be used to repay a portion of HW’s senior secured credit facility.

1/18/07- Said that it would conduct a fourth commercial run of its HCAT™ catalyst technology for the upgrading of heavy oil to higher-value distillates. The company has signed an agreement with a European refinery to demonstrate HCAT under commercial conditions, which is slated to commence by mid-2007. This will be the second commercial-scale test in a European refinery, in addition to the two conducted in the U.S.

1/22/07- Said that it had completed the sale of convertible senior subordinated notes announced by the company on 1/16/07. The aggregate amount of the sale was $160M, including the full exercise of the over-allotment option.

1/30/07- Reported earnings for the December quarter, its fiscal Q1, pre-open. Total revenue for the quarter was $274.9M (-2% Y/Y), comprising $122.8M (-6% Y/Y) in construction materials, $69.2M (+6% Y/Y) in coal combustion products and $83.0M (-3% Y/Y) from the alternative energy segment. The revenue decline was driven by weakness in the residential housing and remodeling markets, partially offset by better-than-expected synfuel revenue due to the recent decline in oil prices. Net income was $17.0M (-40% Y/Y), or $0.37 per share. HW ended the period with $594.9M in total debt, $54.7M in cash and a current ratio of 1.68.

Out of HW’s 44 total Section 45K licensees and customers, 43 operated continuously throughout the quarter. The company recognized $3.7M in previously deferred license fees in the recent quarter, but still has more than $15M in unrecognized license fees from 2006. Based on current oil prices, there would be no Section 45K phase-out in 2007. For FY07, the company reaffirmed its EPS forecast of $1.60-$1.80, including $1.00-$1.05 from ongoing businesses and $0.60-$0.75 from synfuel operations.

2/15/07- Announced that its Chairman and CEO, Kirk A. Benson, was named Entrepreneur of the Year by Mountain West Capital Network. The release pointed out that when Benson joined the company as CEO in 1999, HW employed 70 people, had more than $28M in debt and just $6.7M in annual revenue. The company now employs more than 4000, and had more than $1B in revenue and $100M in net income in FY06.

2/20/07- Formed an alliance with Consol Energy, Inc. Under the terms of the agreement, the companies will work together to perform preliminary engineering, environmental and marketing activities related to the potential development of coal-based liquid fuels refineries utilizing Consol’s eastern and western coal reserves. These activities include the construction of at least one facility to produce liquid transportation fuels such as diesel, gasoline, LPG and jet fuel. Consol operates 15 mining complexes in six states, comprising more than 4.3B tons of proven and recoverable coal reserves.

2/21/07- Announced the start-up of Blue Flint Ethanol LLC in Underwood, ND. The venture is majority-owned by a HW subsidiary which will operate the facility, while minority-owner Great River Energy provides energy and related services. The ethanol plant is co-located with Great River’s 1,100 megawatt Coal Creek Station and will use excess heat from the power plant to process an estimated 18M bushels of corn into 50M gallons of ethanol annually.

3/1/07- Issued a release containing comments management would be making at the company’s analyst day. The discussion gives an overview of the various business units and a synopsis of the capital structure.

Commentary
Shares of HW declined 9% in Q1, extending their 32% slide from 2006. The stock has continued to hold above the $20.50 support range we identified in our Q3/06 report, and appears to us to be forming a bottom. Of course, that will depend on a stabilization of the company’s financial trends. Near-term, the continued moderation of oil prices is improving the picture for the potential recognition of deferred synfuel licensing fees from 2006, which would certainly allow the company to beat its EPS guidance. However, the majority of HW’s revenue is now leveraged to the construction industry, of which the residential segment has made a significant downturn. Longer-term, we are enthusiastic toward the potential of the company’s investments in energy technologies like ethanol, coal-to-liquid and petroleum refining catalysts. The debt burden remains considerable, but this management team has proven adept at financial engineering over the years. Currently trading at 11x EPS, 0.8x sales and 1.1x book value, we believe shares of HW offer significant appreciation potential.