Second quarter earnings post strong results
Senior leadership remarks on Wheelabrator divestiture
Houston – Last week, Waste Management released its second quarter (Q2) financial performance, posting strong results at the midpoint of the year, including higher revenue, lower costs and steady yield growth.
In addition, the company announced a definitive agreement to sell Wheelabrator Technologies — its waste-to-energy subsidiary — to Energy Capital Partners (ECP) for $1.94 billion. The transaction, which is expected to close later this year, will allow Waste Management to grow by acquiring companies, pay down debt and position itself for greater shareholder return.
“The solid performance we saw in the first quarter continued throughout the second quarter,” said David Steiner, president & CEO for Waste Management. “Through the first six months of 2014, our employees are executing on our business plans and we are encouraged by the strong results.”
Here are some of the Q2 financial highlights:
- Revenue increased $35 million year-over-year, or one percent, to $3.56 billion
- Both operating expenses and sales, general and administrative costs (SG&A) saw a decline with SG&A dropping to 9.9 percent of revenue
- Yield remained strong at 2.3 percent, marking the fifth consecutive quarter above two percent
- Recycling contributed to positive earnings thanks in large part to operational improvements
- Free cash flow increased $100 million to $447 million
- Waste-to-energy earnings were flat for the quarter
In tandem with its earnings release, Waste Management announced the sale of Wheelabrator to ECP, a deal that includes 17 waste-to-energy power plants, four independent power plants, four ash monofills and three transfer stations. In addition, the transaction will also divest an ongoing development and construction project in England.
In explaining the announcement to employees, Steiner said there are two components to Wheelabrator’s business: 1. The front end, which operates like a landfill, and the company receives tip fees for disposal; and 2. the "back end" component where the company is paid for the electricity we produce.
“These electricity payments aren’t a natural strategic fit for our go-forward strategy, nor do we have the kind of energy expertise that ECP has,” Steiner said. “The front-end piece, however, is a great strategic fit for us. It’s what we do very well, and once this transaction closes later this year, we’ll enter into long-term waste supply agreements with ECP to feed these plants, just as we do today.”
More information about the transaction will be communicated leading up to and following approval from the Federal Energy Regulatory Commission. For the quarter, earnings from waste-to-energy were flat.
Q2 operations While the recycling side of the business hasn’t “turned the corner,” it did contribute to positive earnings in the second quarter despite a further decline in commodity prices. Overall, it provided $0.01 in earnings per share, which equates to about $7 million. Most of these gains can be attributed to improved operations, better enforcement of contaminated loads and modifications to the way the company calculates recycling rebates.
Still, though, with recycling commodity markets lower year-over-year, the company will need to continue to work diligently to improve its operations further, particularly on the quality of materials being baled and sold overseas.
Turning to core pricing, the company reported a 2.3 percent yield, which is the fifth consecutive quarter over the two percent mark. In addition, each of the company’s lines of business had a positive yield, with the exception of landfill construction and demolition (C&D) waste.
On the collection and disposal side, volumes trended lower for collection (down 1.4 percent). However, those declines were more than offset at WM’s landfills and transfer stations, which saw increases. Combined special waste and revenue generating cover volumes rose 2.1 percent, municipal solid waste grew 4.4 percent and C&D 11.5 percent. This led to income from operations increasing by $9 million, which is the fifth consecutive quarter of growth.
Lastly, Waste Management saw improved costs within both the company’s corporate functions (SG&A) and frontline. In total, operating expenses fell $10 million to 64.6 percent of revenue. This was led mainly through the sale of assets, improved recycling operations and improvements along the transfer and disposal lines of business. SG&A fell to 9.9 percent of revenue.
“We’re encouraged by the results through the first six months of the year, which put us on track to meet our full-year targets,” said Jim Fish, chief financial officer for Waste Management. “The strong momentum in our strategy and cost controls sets us up nicely for the second half of 2014 and positions us for continued success into 2015.”
Speaking about Wheelabrator, Steiner said, “Wheelabrator is a high-performing organization that reflects the quality of the people — our friends and colleagues who operate it. I want to thank President Mark Weidman and the entire Wheelabrator team for their hard work and dedication. They made our waste-to-energy business successful, and we anticipate the business will continue to be successful under Mark’s leadership and ECP’s ownership.”