Waste Management (WM) is shifting its focus to natural gas powered heavy-duty trucks in order to reduce its fueling cost and submit competitively priced bids for waste management service contracts. It chose natural gas since it's the most viable transportation fueling option, and its prices aren't highly dependent on the global economic events. Natural gas is far cheaper, almost 50% lesser than diesel prices, and the most cost efficient energy resource. Waste Management is focusing on reducing its diesel fuel cost, which rose 29% and 3% in 2011 and 2012 respectively. The fuel cost represented more than 7.25% of the company's overall operating expenses in 2012. In order to hedge any further rise in diesel prices and reduce its diesel consumption it is harvesting its landfills.
The company is building a renewable natural gas facility at Milam Landfill in Fairmont City, Illinois, and it is expected to begin its gas deliveries in 2014. The facility will be designed to process nearly 3,500 standard cubic feet per minute, or SCFM, of incoming landfill gas, which is equivalent to 105 million British thermal units per hour. The natural gas produced from this facility can fuel around its 400 CNG collection trucks daily and represents more than 10% of the natural gas currently used by its CNG fleets. Waste Management of Illinois currently has more than 100 CNG trucks in its fleet, displacing about one million gallons of diesel fuel per year. Additionally, the Milam Resources Natural Gas facility is expected to produce 13,000 gallons of liquefied natural gas per day, and once this facility is completely established, it will be used to fuel truck fleets and other equipment that run on natural gas resources.
The company is currently operating more than 2,400 collection trucks, the largest heavy-duty natural gas fleet in the US. To refuel its natural gas based trucks, it has established a network of around 50 fueling stations across North America to service these vehicles, and 18 are accessible to the public. Waste Management has nearly 134 projects that use landfill gas, which produce more than 680 megawatts of power capacity. This is sufficient to power around 500,000 homes and replace 2.5 million tons of coal per year. The initiatives taken by the company to harvest its landfills will provide the opportunity to refuel its natural gas powered heavy-duty trucks. I expect Waste Management will reduce its diesel fuel expenses significantly, which will allow it to bid competitive prices. Further, its additional fueling stations that are opened to the general public will also contribute to its top-line.
Competitors on the same path
Waste Management and its peer companies like Republic Services (RSG) and Waste Connections (WCN) have initiated steps towards the use of green energy resources. Republic recently announced its intent to deploy an additional 49 fleet vehicles that will run on CNG. Over the last year, the company has replaced old diesel based trucks with 104 new CNG based trucks in Houston. To fuel its fleets, Republic installed two natural gas fueling stations, and these stations will be used to refuel its own trucks as well as other public vehicles. It will provide an option to Republic to reduce the per mile fuel consumption. This facility will be added to its current 26 natural gas fueling stations operated nationwide. The company is operating more than 1,400 CNG vehicles and around 50% of all the vehicles purchased in 2013 are based on its domestic fuel sources. This initiative will enable it to offer competitive prices, which will also help the company enhance its customer base.
On the other hand, Waste Connections, with its subsidiary GreenTeam, formed the partnership with Integrys Energy group's (TEG) CNG business unit to develop a new natural gas fueling station in San Jose. Waste Connection will spend around $15 million on CNG-powered fleets and infrastructure. The company will use this fueling station to refuel its fleet 18 CNG based trucks. This may help the company compete with the other waste management companies by offering better prices for its collection, transfer, disposable, and recycling services.
I believe waste management companies, with the initiative of harvesting their landfill gas and replacing their old diesel based trucks with the new natural gas heavy-duty trucks, will able to reduce their fueling cost, which will further improve their bottom-line.
Company building growth base with acquisitions
After analyzing the increasing economic development in Southeast Minnesota, Waste Management is looking to capitalize on the growth opportunity in this region. In November, Waste Management acquired Minnesota based waste hauler company, Alli Rolloff Inc., with which it gained control over Alli Roll's five trucks and added more than 3,000 new customers. This acquisition will support its Minnesota operation and help build a stronger waste collection operation.
In the last quarter, Waste Management also acquired Oak Grove Disposal, an Oregon based waste collection company. This acquisition enabled the company to enhance its footprint in the Pacific Northwest region. The company is serving more than 23,000 customers in Oregon, and with this acquisition, it added nearly 43%, or 10,000, new customers and 15 trucks plus eight satellite vehicles in this region. I expect contribution from Oak Grove Disposal will significantly enhance the company's revenue from this region.
Last year, Waste Management was able to generate revenue of $535 million from its acquisition with year-over-year revenue growth of 19%, and to date it has generated revenue of $464 million from acquisitions.
Last year, Waste Management was able to generate revenue of $535 million from its acquisition with year-over-year revenue growth of 19%. The acquisitions contributed nearly 3.9% of the total revenue in 2012 compared to 3.4% in 2011.
Total Revenue ($ billion)
Revenue from Acquisition ($ million)
Acquisition as a Percentage of total revenue
I believe these acquisitions will enable Waste Management enhance its capacity and its total customer base, which in turn helps strengthen its top-line this year.
Something useful for Waste Management's investors
Waste Management has a strong dividend payout and share repurchase history, with which it has returned around $6 billion to its investors since 2007. The company has achieved its annual dividend payout target of $1.46 per share. In last five years its dividend grew 7.3%, and it is expected that the company may set a higher dividend guidance for 2014, which it may achieve comfortably. Waste Management earned EPS of $1.5 year-to-date, and combining it with the growth strategy, I believe it will be able to achieve its 2013 EPS guidance of $2.15-$2.2 comfortably. I recommend buying this stock.