Casella Waste Systems and Northeast Disposal Dynamics

We were recently able to speak with CEO John Casella and CFO Ned Coletta of Casella Waste Systems (CWST). Here are some highlights from that discussion, primarily focusing on the changing disposal dynamics in the Northeast, as Casella views them, as well as other ongoing, positive developments at the company.

That was Then, This is Now

Despite its density and high tip fees, the Northeast has been a difficult market for the solid waste industry during the past five years, plagued by overcapacity and very competitive pricing, exacerbated by the loss of volumes in the Great Recession and the subsequent slow recovery. Casella believes that the situation is now reversing, and that the Northeast market, particularly in the areas Casella is a player in, has a runway of three to five years of improving fundamentals, with the balance of power shifting back to the disposal facility owners from the haulers.

 By Casella’s estimation, roughly 1.5 million tons of disposal capacity has closed in the last three years, and an additional 1.3 million tons per year is expected to close in the next several years, only partially offset by capacity additions of 0.4 million tons. This represents a net closure of 2.4 million tons, or roughly 25 percent of estimated total capacity in the New England market.  

Since 2003, Casella has added more than 80 million tons of new landfill capacity, from roughly 30 million tons in 2003 to 110 million tons in 2014. Casella’s disposal facilities were operating well under capacity, and during the past two years, the company has made a major push to increase landfill volumes, resulting in a gain of 660,000 tons.

As a result, Casella is now operating fairly close to permitted capacity, at least in its Eastern (or New England) region. With that accomplished, the company intends to switch its strategic focus from volume to price, now looking to improve the returns on its facilities. In fact, for 2015, it has budgeted flat landfill disposal volume, and its internal growth goal stems primarily from expected price gains. 

The Two Faces of the Northeast

Casella’s optimistic outlook stands in direct contrast to Progressive Waste Solutions’ (BIN’s) recent experience and results in the Northeast region, which have been a source of disappointment for the company with depressed margins. It appears the old adage “location, location, location” applies here as well. Casella’s estimates and outlook for a changing supply/demand disposal dynamic are very state specific, and concentrated in the New England portion of the Northeast—in particular, the states of Maine, Massachusetts, New Hampshire and Vermont.

Of particular note in this market area is the fact that several of the solid waste companies–Casella Waste, Waste Management and Covanta–have actually shut down capacity in the New England area, which is generally unheard of in the industry, given that closure/post-closure liabilities get triggered.

Progressive Waste is a much bigger player in the state of New York, particularly given its enormous Seneca Meadows landfill, which is not yet enjoying the same dynamics. In its Western region–western New York and northern Pennsylvania–Casella’s facilities remain underutilized, as it has 400,000 tons of excess capacity in this area.

That said, even in western New York state, pricing seems to be getting more rational—no upturn yet, but perhaps nearing the end of the downward slide. Progressive also had a large presence in the competitive Long Island market, which the company has just exited with the sale of its Long Island operations to Winters Brothers. Progressive was able to redeploy the proceeds into tuck-in acquisitions in Texas, which carry higher margins.

New York City Contracts Are Key to Western Region Improvements

A lot of hope is being placed on the award (and operating execution) of New York City’s solid waste contracts to change the disposal dynamics in western and upstate New York. The first contract has been awarded to Covanta. The second contract had looked like it would go to Progressive, but a last-minute hitch put it out for rebid.

Progressive, Waste Management and Covanta have all participated in the rebid, and an award could be forthcoming this spring. All the bids plan to utilize at least some New York state disposal capacity—if not immediately, at least eventually. It is expected that an additional 1 million tons per year will be disposed of in New York, potentially and partially in 2016, but more likely by 2017.

Obviously, Progressive would be the biggest beneficiary, improving the tonnage into, and prospects for, its Seneca Meadows landfill. But, Casella also hopes to be a secondary beneficiary, as new tonnage into the western waste shed should enable it to push out or re-price its lowest priced waste at its own facilities in that region, where it has five landfills. In the meantime, it is looking to source more special waste into these facilities.

In the Meantime, Divesting and De-Risking

As these positive external events have been developing and unfolding, Casella has been busy internally as well. The company has transitioned to a calendar year, from an April fiscal year, which should aid its forecasting and also make it more easily comparable to the other solid waste companies.

Perhaps somewhat obscured in the “transition” period as it switched to a calendar year, has been the company’s balance sheet clean-up and de-risking process. During the course of the past year, it has exited three businesses—BioFuels, a capital intensive construction and demolition processing business; the Maine Energy waste-to-energy plant; and a wastewater treatment plant. Together, these businesses generated no earnings before interest, taxes, depreciation and amortization, gobbled $8 million in capital spending (capex) annually and took a tremendous amount of management’s time and attention.

The capital savings have been put back into the fleet, allowing for the purchase of 72 trucks. This action underscores Casella’s refocus back on its core competency. The company also recently completed a refinancing at reasonable terms, which extended its debt maturities to 2020 from 2016.

Recycling Getting a Makeover as Well

Similar to Waste Management’s actions, Casella is also restructuring its recycling contracts and changing the way it gets paid for the value-add service. On third-party waste that comes into its material recovery facilities, it is instituting tip fees, reflecting the depressed level of commodity pricing today versus the processing costs. On what arrives on its own trucks, Casella is instituting what it calls an offset, or adjustment fee, which works very similar to a fuel surcharge, but obviously is based on recycled commodity prices. At current commodity price levels, Casella is not getting a proper return on its recycling assets, and these steps are designed to remedy that over time.

Additionally, the company’s regional positioning is an advantage in this case—the Northeast’s high tip fees make recycling economics more attractive, while the region also tends to have supportive regulatory structures for recycling.