I first became aware of Covanta
That was about 80% ago. Not too long ago, I heard the name Covanta again during a Bloomberg interview of company Chairman Sam Zell, the Chicago real estate mogul who has been in the news quite a bit lately as both a buyer and a seller. Zell's stake in Covanta is valued at nearly half a billion dollars, while Whitman's fund holds about $200 million worth. With these two hugely successful investors on board, I just had to take a closer look.
Covanta has an intriguing business model. Imagine if Coca-Cola
Sounds ridiculous, right? Well, Covanta deals in ickier raw materials -- municipal solid waste. So icky, in fact, that municipalities pay Covanta to process the waste, which the company uses to generate electricity or steam. Sales of energy on the back end produce a second revenue stream.
Of course, this is an extremely capital-intensive business. The capacity to process a municipality's waste has to be built from scratch. Fortunately, tax-exempt bonds provide some of the financing for these construction projects, which certainly makes them more palatable. Also, the high level of free cash thrown off by this type of operation contributes to paying down the project debt within a reasonable time frame. It certainly helps that contracts are written for up to 20-year periods, providing a long-term, predictable revenue stream.
In addition to this basic dollars-and-cents view, Covanta has an environmental angle going for it. The energy produced via its exclusively licensed mass-burn technology is clearly renewable; it is reliable -- i.e., not sourced from a politically unstable region of the world; and it is relatively clean, compared with a coal-fired power plant. In a very heavily regulated industry, Covanta appears to be very well positioned in the face of potential energy and climate change regulations.
I have provided only a partial glimpse of Covanta's operations. The company operates non-waste-related renewable-energy projects in the U.S. and Italy, and it generates power the old-fashioned way in several developing countries. Perhaps most intriguing on the international scene is Covanta's recent acquisition of a 40% interest in a Chinese waste-to-energy firm.
If you want to learn more, the recently filed 10-K is a great place to start. At 300 pages, you'll need to generate some energy to get through all the details. You might even need to burn the midnight oil. But if, like me, you're considering an investment here, it's certainly not a waste of your time.
Think it's not easy being green? Here's more clean-tech Foolishness to get you up to speed:
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Fool contributor Toby Shute once got someone to pay him to take some pesky trash off his hands. You can contact him at firstname.lastname@example.org for the rest of that story. He doesn't own shares in any company mentioned in the story. Starbucks is a Stock Advisor recommendation. The Fool has a clean, reliable disclosure policy.