The Future of These 2 Big Dividends Might Be Powered By Garbage (No, Really)

Can garbage and wastewater grow the dividends of Waste Management and Veolia Environnement?

Maxx Chatsko
Maxx Chatsko
Jul 26, 2014 at 12:39PM
Energy, Materials, and Utilities

Treating wastewater could become more profitable than ever before. Source: Rjgalindo/ Wikimedia Commons.

The U.S. Environmental Protection Agency recently finalized new rules for the Renewable Fuel Standard that recognizes natural gas fuels -- compressed natural gas, liquefied natural gas, and natural gas burned to create electricity to charge electric cars -- sourced from renewable biomethane as advanced biofuels. To qualify for generous incentives and credits, methane will have to be captured from a qualifying source such as a landfill, farm, or wastewater treatment facility. That's not typically what comes to mind when you think of renewable fuels or natural gas, but there's a sizable opportunity awaiting waste specialist Waste Management (NYSE:WM) and wastewater expert Veolia Environnement (NASDAQOTH:VEOEY) -- both of which own large sources of biomethane.  

Investors in these above average dividends can think about the new opportunity in biomethane in two groups: (1) companies processing biomethane into fuels and chemicals and (2) companies owning the sources of biomethane. Waste Management and Veolia Environnement fall neatly into the latter category, as they own an impressive chunk of the production potential within the United States. While the new EPA rules will probably catalyze partnerships between companies in the two aforementioned groups, neither Waste Management nor Veolia Environnement has wasted time extracting value from their vast reserves.

Garbage in, money out
Waste Management has been studying (and patenting) bioreactor landfill concepts (link opens a PDF), which cost-effectively extracts methane from landfills by controlling the flow of liquids and gases for each facility. In addition to capturing methane for electricity production or fuels and chemical manufacturing, the company's bioreactor landfills breakdown solid wastes in years -- not decades -- to lessen the environmental footprint of facilities.

This bioreactor landfill concept is patented by Waste Management. There are four different concepts being evaluated. Source: Waste Management.

This isn't an overly optimistic opportunity, either. Waste Management has already built and retrofitted 10 waste facilities in the United States and Canada with concepts similar to that shown in the previous illustration to collect data, refine the technology, and eventually implement it across its asset portfolio. The company has even converted part of its garbage truck fleet (link opens a video) to run on LNG derived from biogas and plans to generate 915 MW of electricity -- enough to power 2 million homes -- from biogas by the end of the decade. It produces 550 MW of electricity from landfill gas today, but with new EPA standards in place, how big of a player will Waste Management become in the quest to expand the electric-vehicle market?

You know what in, money out
Veolia Environnement owns over 200 wastewater facilities throughout North America, which presents a sizable biomethane opportunity. There are an estimated 16,000 wastewater treatment facilities in the United States, but only about 3,200 can economically produce biomethane (need to process approximately 1 million gallons of water each day), according to The American Biogas Council.

Does your local wastewater treatment facility own a biogas system? Source: American Biogas Council.

Of that total, only about 1,200 utilize systems to capture biomethane, although the overwhelming majority burn the gas in combined heat and power systems. Many, including Veolia Environnement, have been nudged by increasingly favorable EPA legislation and are now thinking about retiring that equipment to instead produce biomethane for fuel and chemical production. What's the overall opportunity? The U.S. Department of Energy estimates that nearly 43 billion gallons of residential wastewater will be treated daily by 2025 -- a volume the EPA estimates could create over 160 million cubic feet of biogas annually. That's not a very large volume -- suggesting the agency's calculation is well off the correct value -- but the value of biomethane can be unlocked simply by investing in an anaerobic digester system.

However, adding an anaerobic digester system to a wastewater treatment facility increases its usefulness beyond wastewater (food waste can also be processed, for instance), which makes it difficult to predict the true potential. At a Congressional vriefing (link opens a PDF) on the biogas production potential of wastewater treatment facilities, Patricia Sinicropi of the National Association of Clean Water Agencies estimated the wastewater in the United States could supply 12% of nation's total electricity needs. Not bad for a bunch of, well, you know.    

Foolish bottom line
Both Waste Management and Veolia Environnement are poised to tap into new markets for their vast biogas reserves. Remember, companies with the ability to process and convert biogas into fuels and chemicals will need to partner with the pair and others in their group to gain access to feedstock, which will provide additional value to shareholders via collaboration profit-sharing. It may not be easy to keep up with every new law and regulation, but know that this EPA rule only creates value for these two dividend kings.