HOUSTON — Waste Management Inc. will sell its waste-to-energy business to private equity firm Energy Capital Partners for $1.9 billion, the company announced Tuesday.
The business, Wheelabrator Technologies Inc., owns or operates 17 waste-to-energy facilities, mostly in the East Coast, New England and Florida, as well as four independent power-producing facilities and other assets.
It earned $845 million in revenue last year.
Waste Management expects to use the proceeds of the deal to acquire other assets, repay debt and repurchase shares, the company announced.
“This transaction aligns with our goal of driving shareholder value by maximizing our focus on our core business and reducing earnings volatility related to electricity sales,” said Waste Management President and CEO David Steiner in a statement.
The Wheelabrator waste-to-energy facilities burn solid waste in boilers that produce high-pressure steam. The steam generates electricity, which is then sold into wholesale market. The facilities process more than 7.5 million tons of waste annually.
The business earns revenue from the fees it receives for collecting trash that goes into those facilities, and from the sale of electricity they generate.
But the latter revenue stream proved problematic because of the volatility in electricity prices. “We do not view the energy payments as strategic, and we do not have the depth of energy expertise that Energy Capital Partners has,” Steiner said on a conference call with investors Tuesday morning.
In recent years, several of the contracts in place at the Wheelabrator facilities expired, exposing them to volatility in electricity prices. In most of the places where Wheelabrator operates, electricity prices correlate with natural gas prices, which have fallen in the last few years, making it harder for Wheelabrator to earn money from the electricity part of the business.
Ironically, the Wheelabrator division has performed exceptionally strongly in recent months. It reported $54 million in profits in the first half of the year, up from $13 million in the first half of 2013, according to the company’s quarterly Securities and Exchange Commission filings. The company attributed the boost to higher electricity prices in the first quarter of 2014 associated with an exceptionally cold winter.
But that was seen as a one-time event. In its annual report filed earlier this year, the company warned that given the volatility of electricity prices, it “may not be able to enter into renewal contracts on comparable or favorable terms, or at all,” given those market changes.
Last year, Waste Management took a $483 million impairment charge on its waste-to-energy goodwill, reflecting the company’s view that long-term energy prices and the volume of waste disposed at the plants wouldn’t dramatically improve. That impairment was part of the reason Waste Management’s profits were down 88 percent in 2013.
As part of Tuesday’s transaction, Waste Management gets will enter a 7-year agreement with Energy Capital Partners to supply waste to the facilities the private equity firm is buying. That move is seen as one that allows Waste Management to continue benefiting — to a degree — from the waste disposal activity considered more core to its business than power generation.
Tyler Reeder, a partner at Energy Capital Partners, said in an interview that Waste Management would continue to deliver about the same amount of waste to the facilities as it currently does.
“We will use our expertise to fill up the plants … just like we do today, but we will no longer have the volatility of financial results related to Wheelabrator electricity sales,” said Steiner of Waste Managemetn.
Reeder said the Wheelabrator business compliments Energy Capital Partners’ existing portfolio of power plants. The company, through its subsidiary EquiPower Resources, owns or operates eight power plants including five in New England and the East Coast, according to its website.
He said the deal makes sense for Energy Capital Partners, since it has more experience managing the volatility of the energy markets than Waste Management.
Energy Capital Partners’ power plants are mostly gas- and coal-fired, and the deal gives the company the opportunity to diversify, Reeder said. The company may expand the waste-to-energy business by developing new plants as well, he added.
The deal does not include several high-profile experimental projects Waste Management has pursued in recent years including a plastics-to-oil facility to Oregon and a plant in San Antonio that transforms garbage into pellets that can substitute for coal.
Waste Management officials said they had been negotiating the deal with Energy Capital Partners for about six months, acknowledging they had received interest from other potential buyers before that.
The deal still requires approval from the Federal Energy Regulatory Commission and is expected to close in three to five months, company leaders said.
By the third quarter, Steiner said, the company is likely to release more concrete plans on how it intends to spend the proceeds of the deal.
Earlier this year, Waste Management sold its investment stake in Shanghai Environment Group, at the time part of Wheelabrator business, for $155 million.