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WIKI ANALYSIS
American Ecology (NASDAQ : ECOL) provides hazardous waste treatment and disposal services, mostly in the Northwestern United States. The company earned $165 million in revenues in 2007 -- more than double what it made in 2005.[1] This increase can largely be attributed to a contract the company entered in 2005 with Honeywell International (HON) to remove 1.2 million tons of low-level hazardous wastes as ordered by a federal court. This contract, set to expire in November 2009, accounted for 41% of American Ecology's total revenues in 2007.[2]
American Ecology disposes of radioactive, hazardous, and industrial-waste for government and commercial entities such as refineries, steel mills, and academic institutions. The company operates four disposal facilities in Nevada, Idaho, Texas, and Washington; however, since 2005 the company has invested in transportation infrastructure (with 541 rail cars and 2 transfer stations) in order to win larger contracts outside their immediate geographic areas. [3] This investment in infrastructure is partly the reason the company won the contract with Honeywell International (HON), as their cleanup site is located in Jersey City, New Jersey.[4]
American Ecology operates in the highly regulated hazardous waste industry. Federal, state, and other government regulations present significant barriers to entry for other competitors with an array of permits for transporting, treating, and disposing hazardous wastes. In the 1980s, Congress decided that states were responsible for providing disposal facilities for low-level radioactive wastes. Many states formed into compacts with other states to manage their wastes with certain service providers. American Ecology is one of those service providers and holds a monopoly over 8 states in the Northwest Compact and 3 states in the Rocky Mountain Compact for rate regulated disposal of low-level hazardous wastes.[5]
Company Overview
American Ecology operates 4 disposal sites, 2 rail transfer stations, and 3 non-operating disposal sites (which do not accept further wastes). [6] American Ecology was founded in 1952 and is one of the oldest providers of hazardous waste services in the U.S. The company transfers, treats, and disposes hazardous and low-level radioactive wastes for both private organizations and the government. The company traditionally earns revenue from treatment and diposal of hazardous wastes from several types of customer categories including private cleanup projects, disposal of waste collected by brokers, federal cleanup projects, electrical utilities, chemical manufacturers, rate regulated customers, refineries, and steel mills.
| Customer Category [4] | Private cleanup | Broker | Federal cleanup | Other Industry | Rate regulated | Refinery | Steel |
|---|---|---|---|---|---|---|---|
| % of 2007 Treatment and Disposal Revenue | 31% | 23% | 17% | 11% | 8% | 5% | 4% |
Since 2005, the company has been investing in expanding its transportation infrastructure in order to take on larger contracts outside of the Northwest and Rocky Mountain areas. In 2005 and 2006, the company invested $5.5 million and $11.9 million to purchase 541 rail cars. [3] Partly due to this investment, the company won a 1.2 million ton waste contract with Honeywell to transfer wastes from their Jersey City, New Jersey location. This contract, set to expire in November 2009, accounted for 41% of American Ecology's total revenues in 2007.[2] Transportation-related revenue for this type of project can easily account for as much as 75% of total project revenue.[7]
Business and Financial Metrics
In 2007, American Ecology increased total revenues by 42% to $165.5 million compared to $116.8 million for 2006. [8] The 2007 revenues also represent more than double the revenues earned by the company in 2005. [8] That said, the company has seen a decline in its profit margin for three subsequent years starting from a high of 41.33% in 2004 and falling to a low of 11.72% in 2007.[8] This coincides with a three year increase in transportation costs for the company, starting at $22 million and 28.1% of revenue in 2005 and growing to $79 million and 47.9% of revenue in 2007.[8]
American Ecology has no significant long term debt, and as of December 31, 2007, the company had $29 million in working capital.[1] Over the past five years, the company has seen its stock rise from a low of $2-3 per share in 2003 to $20-30 per share for the majority of 2007 and 2008.[9] The company has also raised its quarterly dividend to $0.18 for the 2Q2007 after paying a $0.15 dividend for 12 consecutive quarters. [10]
| High Value Customers [11] | |||
| 2007 | 2006 | 2005 | |
|---|---|---|---|
| Honeywell International (HON) | 41% | 38% | 9% |
| U.S. Army Corps of Engineers | 6% | 10% | 27% |
Two of American Ecology's clients, Honeywell International (HON) and the Army Corps of Engineers, account for almost 50% of the company's revenues in 2007. No other client has accounted for more than 10% of American Ecology's business over the past three years. [11]
Business Segments
American Ecology operates in two business segments -- Operating Disposal Facilities and Non-Operating Disposal Facilities -- however, Non-Operating Disposal Facilities do not generate any significant revenue.
Operating Disposal Facilities accept hazardous and low-level radioactive wastes. American Ecology owns four operating disposal facilities with one each in Beatty, Nevada; Grand View, Idaho; Robstown Texas; and Richland, Washington. [13] American Ecology earns the majority of its revenues with its operating disposal facilities and the transfer, treatment, and disposal of wastes to these facilities.
Operating disposal facilities generate two types of revenue -- Event business and Base business. Event business projects are one-time waste clean-up projects that can last from one week to several years. Base business represents waste received from recurring customers. The nature of both of these businesses creates significant variations in quarter-to-quarter and year-to-year revenue, profit, and operating income. In 2007, Event Business earned 54% of total revenues while Base Business earned 46%. Event business revenue grew 31% in 2007 while Base business revenue grew 19%.[8]
American Ecology maintains four Non-Operating Disposal Facilities with one each in Sheffield, Illinois; Beatty, Nevada; Bruneau, Idaho; and Winona, Texas.[13]. Non-operating disposal facilities generate minimal revenues and no profit. [8]
Key Trends and Forces
Government regulations and public opinion place significant barriers to entry in the hazardous waste sector
In 1999, the Federal District Court in Washington halted efforts to transfer 1,000 acres of federal land to the state of California, which was subsequently planned for sale to American Ecology.[14] In 1993 the Clinton administration shut down the construction of any new hazardous waste incinerators (for hazardous waste treatment) for 18 months. At the time, there were 20 hazardous waste incinerators across the country.[15] Fifteen years later, there are still only 22 facilities permitted to incinerate hazardous wastes.[16]
Aside from the industry's two major laws -- the Resource Conservation and Recovery Act of 1976 (RCRA) and the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) [17] -- the company (and its competitors) must comply with the Toxic Substance Control Act of 1976, the Atomic Energy Act of 1954, the Energy Reorganization Act of 1974, and several other regulations currently under appeal.
The hazardous and radioactive materials disposal business is highly regulated by state, federal, and local regulations. American Ecology's facilities are regularly inspected to ensure compliance with their required permits and licenses. The combination of these regulations, and the public outcry over such facilities [15], presents a significant barrier to entry for competing firms.
Federal funding shortages may keep government clients from renewing contracts
With 17% of American Ecology's treatment and disposal revenue coming from government event clean-up projects, a disruption in federal funding could significantly hurt the company's revenues. [4] Revenue from the Army Corps of Engineers, for example, has declined significantly over the past three years from a high of $21.4 million in 2005, to $11.68 million in 2006, and $9.93 million in 2007 due to both project timing and reduced use of the contract by the US EPA. The contract with the Army Corps of Engineers expires in 2009. [18] [12] The 2005 federal budget contained the highest ever request for funds for hazardous and radioactive waste clean up projects.[19]
Government projects depend on project-specific funding, and in recent years, a number of these projects have been funded by potentially liable private parties as government funding has reduced.[18]
Event business contracts are non-recurring and often rely on court-ordered cleanup projects
American Ecology's contract with Honeywell International (HON) relied on court pressure to ensure continuous operation. In October 2005, Honeywell International (HON) stopped waste shipments and filed with the U.S. District Court in New Jersey to reduce their obligation to remove material from their site. The court denied the appeal but shipments did not resume until April 2006. American Ecology was paid deficiency payments for the disruption, but this demonstrates the business' reliance on the courts. [2]
American Ecology has made significant investments in transportation infrastructure in order to obtain large clean up contracts like the Honeywell International (HON) contract. The company has seen its transportation costs increase to more than 3x their levels in 2005 compared to 2007. [8] While American Ecology's investment can help them win new contracts outside of the Northwest, they still rely on court-ordered mandates to clean up waste facilities.
Natural disasters can disrupt operations and limit revenue
As reflected in the number of regulations placed on the company, American Ecology operates in a dangerous industry susceptible to natural disasters. A fire on July 1, 2004 at the company's Robstown, Texas facility halted operations, ruined equipment, and cost the company $2.1 million in lost revenue.[20] The company is also susceptible to seasonal fluctuations in operations due to cold and snow and any other event that may disrupt their ability to transport hazardous wastes.
Competitors
For rate regulated clients in the Northwest, American Ecology has a monopoly over hazardous waste services. Outside of this area, American Ecology competes with both large waste service providers and niche waste service providers for low-level hazardous waste and radioactive waste disposal contracts. American Ecology's main competitors outside of the Northwest include:
- Waste Management (WMI) - Waste Management is North America's largest solid-waste collection provider for all types of waste disposal. Waste Management competes directly with American Ecology for hazardous waste disposal. In 2007, Waste Management earned $13.3 billion in total revenue.
- Clean Harbors (CLHB) - Clean Harbors competes with American Ecology for hazardous waste disposal. The company counts 325 of the Fortune 500 as clients and operates six incineration facilities. In 2007, Clean Harbors earned $946 million in revenue.
- Waste Control Specialists, LLC - Waste Control Specialists competes with American Ecology for both hazardous and radioactive wastes. Waste Control Specialists is wholly owned by Valhi (VHI) earns approximately $4.2 million in revenues, annually. Waste Control Specialists operates largely in the Southwest.
- EnergySolutions - EnergySolutions provides radioactive disposal services for government and commercial customers. As a speciality radioactive disposal company, EnergySolutions' clients extend past the U.S. One of its largest customers is the U.K. government. In 2007, the company earned $1.1 billion in revenue.
References
- ↑ 1.0 1.1 1.2 ECOL, 2007, 10-K, Item 6, Page 20
- ↑ 2.0 2.1 2.2 ECOL, 2007, 10-K, Item 1A, Page 13
- ↑ 3.0 3.1 ECOL, 2007, 10-K, Item 6, Page 29
- ↑ 4.0 4.1 4.2 ECOL, 2007, 10-K, Item 6, Page 21
- ↑ National Directory of Brokers and Processors
- ↑ ECOL, 2007, 10-K, Item 1, Page 4-5
- ↑ ECOL, 2007, 10-K, Item 6, Page 21
- ↑ 8.0 8.1 8.2 8.3 8.4 8.5 8.6 ECOL, 2007, 10-K, Item 7, page 24
- ↑ Google Finance Chart for ECOL
- ↑ "Key Developments for American Ecology Corp", Reuters, July 1, 2008
- ↑ 11.0 11.1 ECOL, 2007, 10-K, Page 47
- ↑ 12.0 12.1 ECOL, 2007, 10-K, Item 1, page 10
- ↑ 13.0 13.1 ECOL, 2007, 10-K, Item 1, page 4
- ↑ "Plan to Build Nuclear Dump In the Mojave Appears Dead", The New York Times, April 4, 1999
- ↑ 15.0 15.1 "Administration to Freeze Growth of Hazardous Waste Incinerators", The New York Times, May 18, 1993
- ↑ "Commercial Hazardous Waste Incinerators", Environment, Health, and Safety Online, 2008
- ↑ ECOL, 2007, 10-K, Item 1, Page 7
- ↑ 18.0 18.1 ECOL, 2007, 10-K, Item 7, page 22
- ↑ Info U.S.A. Bush spending proposals for 2005
- ↑ ECOL, 2007, 10-K, Item 7, page 34
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