Thursday, August 9, 2007

Your Trash - Someone Else’s Treasure

Your Trash Is Treasure To Covanta

Green technologies aren't all about solar panels soaking up rays of sunshine or windmills spinning in the breeze.

Sometimes they involve last week's garbage.

A company called Covanta Holding (NYSE:CVA) CVA is one of several alternative energy companies looking to turn trash into electricity in an industry called "waste-to-energy."

The technology isn't new, but it's getting more attention and sales by reducing the messiest of renewable resources. Not only does the technology decrease the need for more landfill space, it thins the clouds of ozone-depleting gas that emanate from landfills.

Analysts say Covanta Holding is the pure-play for investors. It builds and operates these waste-to-energy sites throughout the world. Some believe Covanta should get more attention from investors looking for new "green" stocks, though its share performance pales in comparison to some solar stocks.

"In my opinion, solar energy has gotten a lot of hype," said Pacific Growth Equities analyst J. Michael Horwitz, who rates the stock a buy and whose firm does business with Covanta. "This is the overlooked name in what we call the clean energy (NASDAQ:CLNE) space."

Heating Up

Essentially, Covanta and its peers build plants that burn trash at temperatures around 2,000 degrees. At that temperature, most everything burns -- from tossed-out dinners to used-up lipstick tubes. Like a standard coal or nuclear plant, the heat from the burn turns water into steam, which pushes turbine blades in power generators.

"If we're good at anything, we're good at generating trash," said Paul Clegg, an analyst with Natexis Bleichroeder, who doesn't have a specific rating on the stock. "We've got to do something with it."

Covanta says it produces 7,800 gigawatt hours of power a year, enough to power all the homes in Philadelphia. According to the company, that represents 10% of the renewable energy produced in the U.S., not including hydro power, or 2% of the country's total power output.

The company says it has one big advantage over other alternative energy sources: Unlike solar rays or wind, there's always trash.

"You're not relying on the sun being out or the wind blowing," Horwitz said.

Yet this isn't a renewable energy with zero leftovers.

About 10% of the burn ends up as ash. In Asia and Europe, Covanta sends most of the ash to other plants to help make asphalt or concrete. In the U.S. it's used as substitute cover material for landfills.

Despite this leftover waste, the Energy Policy Act of 2005 has classified the process as a renewable technology. Covanta's chief financial officer, Mark Pytosh, says the waste-to-energy option in an important piece of the renewable energy puzzle. The technology reduces the amount of trash that winds up in landfills, which produce methane gas, a pollutant that's 20 times more potent than carbon dioxide.

"To attack greenhouse gases, every category is going to have to contribute," he said.
Waste-to-energy companies also don't depend on government incentives to be competitive with other energy forms, which have driven sales of solar, in particular, over the past few years.
"We have to compete on economics," Pytosh said.

Covanta also faces competition from other waste-to-energy companies. Waste Management's WMI Wheelabrator Group unit, acquired in 1998, squares off with Covanta in the U.S. Wheelabrator has sites in the Northeast, Florida and one in Spokane, Wash., says Frank Ferraro, the unit's vice president of public affairs.

Globally, one of Covanta's biggest rivals is Paris-based Veolia Environnement (NYSE:VE) VE, a water- and waste-management company that includes a waste-to-energy unit.

Horwitz says Covanta's reputations for consistent operations has helped it compete.
The company's stock had been doing well -- up about 25% from the start of the year -- before it announced second-quarter results that fell short of forecasts.

For the quarter that ended June 30, earnings grew to 21 cents a share, minus one-time gains, 75% over the year-ago quarter but 16% below analysts' estimates. Sales jumped 6% to $355 million.

The stock fell by more than 10% in the following days, also getting hurt by broad market declines. It's now down about 13%.

A shutdown of a plant in March after a fire hurt results. But the company essentially kept guidance intact for 2007, pointing to more upside in the remainder of the year.
Analysts are divided on Covanta's second-half prospects.

Natexis Bleichroeder's Clegg lowered his earnings estimates for 2007 to 69 cents from 73 cents. Pacific Growth's Horwitz raised his to 74 cents for the year from 67 cents, citing growth opportunities with new plants that use old wood to create energy in the U.S.

Overall, the U.S. market isn't exactly red hot. With the country's wide-open spaces, it's usually cheaper to just build more landfills than to reduce trash. The Northeast, with big cities at a close proximity and little land for more landfills, has been the exception. Florida, which has land that makes it difficult to build landfills, also has some waste-to-energy plants.

Other areas may get waste-to-energy plants as green energy gains popularity and large cities sprawl. Covanta officials say Los Angeles officials are expressing interest in Covanta's products, for instance.

Global Opportunity

Europe might be a bigger opportunity for waste-to-energy growth, analysts say. The European Union has issued directives that require less trash for landfills. Italy and the United Kingdom look particularly attractive to Covanta executives.

"The two countries have been slower to adopt," Pytosh said. "We think over the next few years they will build a lot."

Covanta recently landed preliminary approval from the Dublin City Council in Ireland for a waste-to-energy plant. China is another growth opportunity.

Covanta Holding Corporation earlier this year bought a 40% stake in China's Chongqing Sanfeng Environmental Industry Co., which builds and operates energy-from-waste facilities.

According to the company, the Chinese Ministry of Construction has outlined a plan to increase energy-from-waste to 30% of total municipal waste disposal by 2030 from less than 2% in 2005.

"It gives us a strong Chinese presence," Pytosh said.

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