HTI signs license agreement with China’s largest coal company

June 20, 2002 — HEADWATERS Inc. recently announced that Hydrocarbon Technologies Inc. (HTI), a wholly owned subsidiary, has signed a process license agreement with Shenhua Group Corp., Ltd. for a direct coal liquefaction plant to be constructed in China.

Shenhua Group is China’s largest coal company with production capacity approaching 60 million tons per year and coal reserves exceeding 220 billion tons.

Under the agreement, HTI will provide the technology license, process design, and technical services. This will be the first commercial direct coal-to-liquid-fuels plant using HTI’s advanced technology in the world. The $2 billion facility will be located approximately 80 miles south of Baotou, at Majata, Inner Mongolia in the People’s Republic of China.

The plant will have an ultimate capacity of 50,000 barrels per day of ultra-clean, low-sulfur, diesel fuel and gasoline produced from indigenous coal. The license agreement is for three reactor trains planned for the facility, each of which will process approximately 4,300 tons per day of coal. Construction of the first reactor train is expected to begin in early 2003 and the plant is expected to start up in 2005.

The license agreement will become effective after standard approval from the appropriate Chinese and U.S. governmental agencies. In addition to this initial facility, Shenhua Group, a 15% owner of the technology, intends to construct three more direct coal liquefaction plants in the Shengdong Coalfield of China, which spans Shaanxi Province and Inner Mongolia.

Shenhua Group selected the HTI Coal Process after extensive review of processes offered by competing technology providers in North America, Europe and Asia. The HTI Coal Process was developed by HTI with support from the United States Department of Energy. In this process, coal is broken down into small molecules and enriched with hydrogen to form oil molecules which are refined into diesel, gasoline, and other fuels.

Sulfur, nitrogen, ash and other impurities are removed by the process, leaving a very high-grade liquid fuel. China’s abundant coal reserves and low production cost make the Shenhua Project economically viable at recently’s international crude oil prices.

The U.S. Department of Energy has funded the development of direct coal liquefaction technology since the 1970’s oil crisis. In 1996, as part of its technology Proof of Concept Program, the DOE introduced HTI to the State Science & Technology Commission of China and supported signing of pre-feasibility study and “license in principal” agreements with the Shenhua Group for application of the technology.

In 2001, with the full support of the U.S. Department of Commerce, the U.S. Trade Development Agency funded technology verification testing. In April 2002, following pilot plant validation, the Chinese government’s State Development Planning Commission (SDPC) completed a comprehensive review of the Shenhua Project.

A signing ceremony for the process license agreement was held in Washington DC. The agreement was signed by Dr. Yuzhuo Zhang, Vice President of Shenhua Group and Dr. Theo Lee, President of HTI.

Kirk Benson, Chairman and CEO of Headwaters, who presided over the ceremony, stated, “We are excited about the many opportunities created by this landmark agreement with Shenhua Group because we believe direct conversion of coal to liquid fuels is one of the most significant coal innovations in the last 50 years. The HTI Coal Process is being considered for multiple projects and our technology is in a good position to be selected.”

“This transaction confirms the potential we saw in HTI at the time of our acquisition and its ability to create incremental value for our shareholders,” continued Benson.

“While the financial impact of the license agreement won’t be fully realized until the initial facility is operational, we expect that when multiple facilities are operational the direct coal liquefaction business will make a significant contribution to future revenues in the form of annual royalties and license fees. Importantly, this initial commercialization of HTI’s technology represents a critical step in our strategy to diversify our business and create additional long-term revenue streams. By completing this transaction we have accomplished one of the three goals listed in our annual report to be achieved during the 2002 fiscal year.”

Dr. Theo Lee, President of HTI, stated that, “Shenhua Group has exhibited foresight in utilizing China’s vast coal resources to provide the country’s future energy needs in a highly efficient and environmentally safe manner.”

He thanked the U.S. Department of Energy, the U.S. Trade Development Agency and the U.S. Department of Commerce for their commitment to the development of direct coal liquefaction technology. “In addition to providing an export opportunity for United States goods and services, the Shenhua Project’s validation of the HTI Coal Process will provide the United States with a commercially proven clean fuels technology alternative that supports this country’s drive toward energy independence.”

Headwaters’ HTI Coal Process presents an important energy alternative breakthrough for coal-rich countries. Through the production of clean gasoline, diesel and jet fuel derived from coal, these countries can enhance their energy security, lessen their dependence on imported oil, and protect the environment.

About Headwaters Incorporated
Headwaters Incorporated is a specialist in developing and deploying alternative fuel and related technologies. It is focused on converting fossil fuels such as coal and heavy oils to alternative energy products while improving energy efficiency and the environment.

Through its existing alternative fuels business, the Company earns a growing revenue stream that provides the capital needed to acquire and expand synergistic new business opportunities. Headwaters Incorporated trades under the Nasdaq symbol HDWR.

About Shenhua Group Corp., Ltd.
Shenhua Group Corp., Ltd. is a state owned company incorporated in accordance with the system of modern enterprises. The company is responsible for the overall planning, development and operation of coal mines in the massive Shenfu Dongsheng Coalfield as well as the related railway, power plant, coal terminal and shipping fleet.

Shenhua Group is China’s largest coal company with production capacity approaching 60 million tons per year and coal reserves exceeding 220 billion tons. The company is also involved in international trading, finance, transportation, telecommunications and high-tech businesses.

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