It's crown jewel is its Clive, Utah facility for handling low-level radioactive waste (LLRW) and mixed low-level waste (MLLW) which is just about every waste material a nuclear plant produces save the spent fuel. They store 95% of the waste of this type in the entire US. There are only 2 other places in the US capable of handling similar types of waste and they are owned by states. Additionally from the 10-K:
"We are the only commercial disposal outlet for MLLW and operate two of the three commercial LLRW disposal sites in the United States, through our Clive, Utah and Barnwell, South Carolina disposal facilities. The third facility is a state-owned facility located in Richland, Washington that is relatively small, does not accept radioactive materials from outside the Northwest Interstate Compact on Low-Level Radioactive Waste Management States and may eventually stop receiving materials from outside Washington State itself."The company's position as an effective monopoly in the space might be under pressure from another site. There is one planned in Texas that was approved in 2009. It must still go through many phases of permitting, environmental studies, and NIMBYism. Even by the generally business friendly standards of Texas, storing nuclear waste is not a popular business. From ES's 10-K (which might misrepresent the reality, but it strongly correlates with what one would expect from a nuclear waste disposal site construction process):
"Construction may not begin until several reconstruction license conditions are completed and approved by the executive director of the TECQ. Once approved construction is complete, additional conditions of the license must be met prior to commencement of disposal. These conditions will require WCS to complete several major environmental studies, examples of which include groundwater, air emissions, and seismic stability studies. WCS must also demonstrate that the leachate from the landfill will not reach the Ogallala-Antlers-Gatuna Aquifer. Should the license become active, WCS will be allowed to receive waste from the Texas Compact, which includes the states of Texas and Vermont, and from federal facilities (i.e., DOE). WCS will not be able to receive waste via railcar or receive depleted uranium, and will be required to dispose of commercial waste in specially designed containers in the compact portion of the facility."WCS is the company looking to create another landfill for LLRW. Clearly the additional capacity faces constraints in coming online.
The landfill is carried on the books at $30m. The segment it is in, Logistics Processing & Disposal (LP&D) includes several other links in the chain of LLRW disposal generated $240-260m in revnue between 2007 and 2009 and segment EBITDA of $84-100m (Full year 2010 results haven't been released, but it is on track to do about $80m in run rate EBITDA based on the first 9 months). This is the flexing of pricing power, the hallmark of a business you want to own and verification of the huge moat this facility possesses. While the EBITDA figure doesn't take into account corporate expenses, this does demonstrate the massive earnings power of just this one segment/asset. The entire market cap is ~$600m, so ES is potentially undervalued.
There are several other segments: commercial services, federal services, and international. Commercial services cleans up nuclear sites. Federal services does the same but for the DOE. These businesses are more competitive, but the LP&D segment does give it a unique competitive advantage. International operates and cleans up nuclear reactors in the UK. Its contract for the international business is up for renewal in 2012, which is something to look out for.
There's several blemishes to consider when looking at ES though. First is its debt load of $835m. This is eating significantly into EBITDA. Even excluding a goodwill impairment, the company doesn't have 2x interest coverage. A portion of the debt, $300m, is a credit facility to finance restricted cash for collateral on its jobs cleaning up sites through its commercial and federal services segments. While it does operate on long term contracts and has a lot of "guaranteed" revenue, it really isn't guaranteed and even if it had 2x interest coverage, it would be walking a fine line. What would happen if there was a temporary stoppage in shipments to its landfill? That could happen for numerous reasons, natural or man made. Around 10% of the float is sold short, and the risks definitely give some credibility to a short thesis.
ValueAct Capital has a stake in the company. They are polite activist investors who like to get board representation and hold management's hand to run the business with a long term orientation and maximize shareholder value. Here is an interview with one of the guys who runs ValueAct. He is a competent guy who seems to know what he is doing. One thing they look for are choke points in supply chains where out sized pricing power can be exerted. They only like to focus on 10-15 companies, so they don't take a shotgun approach and make concentrated bets. I presume the nuclear waste landfill plays a large part in their thesis.
I love the assets, but I hate the liabilities. I'm not done poking around, and the company should release its 2010 10-K soon, which will be a welcome update on their situation. It is a little annoying the last released financial data dates back almost 6 months. Judging from the monopolistic nature of the nuclear waste landfill, the replacement value is likely greater than the market cap + debt of the company, but I just got burned on Seahawk Drilling with a similar thesis. While I don't want to act like Mark Twain's cat who jumped on a hot stove, it would be necessary to establish the strength of the cash flow and understand some of the other risks.
Disclosure: none
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