Is Your Garbage Man Powering Your Home?

The big rage in the utility industry is switching from coal to natural gas and other environmentally friendly sources. Hidden under all of that is a pile of garbage, literally, because trash is what Covanta is burning in its power plants, earning revenues from electricity sales, trash disposal, and recycling along the way.

Not your ordinary utility
Covanta isn't your normal utility. Relatively small, it operates 45 "Energy from Waste", or EfW, facilities that produce about 1,500 megawatts of electricity. Most of its facilities are in the United States, with just three in China and one in Europe. It also owns 14 other electric facilities, primarily biomass and hydroelectric.

For comparison, Duke Energy , among the largest electric utilities in the country, produces about 100 megawatts more power from its wind operations than Covanta does from its entire business. And wind is puny compared to Duke Energy's over 50,000 megawatt production capacity. But what Covanta lacks in size, it makes up for in ingenuity.

Covanta burns garbage when it makes electricity. In fact, it gets paid to dispose of the garbage (about 60% of revenues), to produce electricity (around 25%), and for materials it recycles (5% or so). That's a claim that Duke Energy can't make. In fact, Covanta says that it disposes of around 5% of all U.S. trash in its power plants, which means there's plenty of room to grow.

Getting paid in three ways is a great business model. However, you can't just throw a match on a pile of garbage and expect it to burn. Covanta uses natural gas. That makes it more like a traditional utility than the company would probably like you to believe and helps explain why recent results have been relatively weak. Low gas prices have depressed wholesale electricity prices, leading to old power contracts being renewed at lower rates and, in some cases, bought out.

The company's recycling business has also been weak of late, with low prices for scrap metals depressing results. That hasn't helped things, either. While this pair represents around 30% of the top line, they provide upside potential since the garbage side is largely a fee-based operation and is in a highly competitive industry.

Bigger trash
Since trash disposal is the big business, Covanta also starts to look somewhat like a Waste Management , with a solid book of fee-based business. Interestingly, Waste Management is also working on the EfW space, burning 7.7 million tons of waste in 2012. That's less than half of Covanta's capacity. That said, in addition to that, Waste Management is using its landfills to produce natural gas. So Waste Management provides additional ways to play the energy from trash angle.

Fellow trash hauler Republic Services , for its part, has around 70 landfill gas projects in its portfolio. And both Waste Management and Republic Services are increasingly focused on the recycling side of their businesses. So while they aren't as focused as Covanta on burning trash to make power, both are pushing into the energy space in important ways.

Leader of the pack
The key trend to watch is the changing view of garbage. You probably don't think about it much beyond getting it to the curb for trash pick up day, but there's a whole lot more taking place after that point. While, once we just threw trash into a pile somewhere else, today that trash is being used.

When it comes to garbage, Waste Management and Republic Services come to mind well before Covanta, but Covanta is the real leader in the EfW space, proving that it can play with the big boys in the utility world and help clean the world at the same time. Expect Waste Management and Republic Services to go down a similar path, particularly since they already have large waste collection operations that could easily be diverted from landfills to power plants.

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The article Is Your Garbage Man Powering Your Home? originally appeared on Fool.com.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Republic Services and Waste Management. The Motley Fool owns shares of Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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