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Wednesday, October 6, 2010

Time for Capital Improvements?


The solid waste industry has seen huge amounts of capital being invested to meet the AB 939 diversion goals and the required truck replacements and modifications to meet the CARB requirements.

Some smaller companies have taken on the Goliaths of the industry and won contracts away. Winning is a great feeling, but winning requires even more capital to service the new contracts. Is the industry at the point where the investments have been made and capital requirements are going to drop significantly? For some the answer might be yes, but for most of the California solid waste providers, there is more to come.

Many California companies invested in material recovery facilities after AB 939 became law. These assets are wearing out. The technology available in the early 90s was not what it is today. The state and local jurisdictions are pushing for higher and higher diversion levels and the need for the latest and greatest technology keeps increasing. This combination of facilities wearing out and the need to enhance diversion combine to require solid waste companies to go “to the well” once again to finance the needed capital improvements.

California Pollution Control Financing (CPCFA) has been a much used medium to cheaply finance the industry’s capital needs in the past, and it would appear this is the financing method for the future as well. The question is not so much how to finance the capital needs, but when.

The economy is not responding as the government hoped for, and as a result there have been rate cuts to try and stimulate economic activity. Is this the time to jump into the capital markets for renovating the aging material recovery facilities? I won’t pretend to have a crystal ball, but I will suggest that now is a good time to start looking at what and when to replace facilities.

Timing the market is a dangerous activity, but trying to take advantage of favorable market conditions makes good business sense. If you have your capital needs scoped out and can get your capital needs accepted for financing by the CPCFA, you can take advantage of favorable market conditions when you believe the time is right. Talk to your financing experts about your needs and what they suggest the best timeline would be for you and your company.

One of the major considerations is when you will be required to replace your facilities; for some companies the time is now. For others it may be within a year or two. Those companies with short-time horizons before renovation should be working now to line up their financing. Talking with jurisdictions about the enhancements available with the newer technology – generally paving the way to renovate, get inexpensive financing, and have the rate regulators ready to accept the added costs created by the new capital.

There is a principle known as the Rule of the Seven Ps, Proper Prior Planning Prevents Piss Poor Performance! Get engaged now, plan for your company’s success. With good planning now, you can take advantage of the economic climate when you believe the time is right.

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