Waste Management: Renewable Natural Gas Business May Be on the Selling Block

According to a May 16 Reuters report, wide-moat Waste Management is considering selling its renewable natural gas business. It could fetch a $3 billion valuation using the 2023 Enbridge acquisition of Morrow Renewables’ RNG operations as a comparable transaction. We presume the report references the firm's renewable energy segment, which, in fiscal 2023, delivered $112 million of EBITDA on $273 million of net sales, or a 41% EBITDA margin. At the end of 2023, the segment had 92 landfill gas projects on owned and operated landfills. Sixty-six projects provide gas to electricity generators, 20 projects generate gas used at the landfill or piped to industrial customers, and six projects process pipeline-quality renewable natural gas sold to natural gas suppliers. In 2023, management announced an ambitious RNG investment plan, which targeted 20 new RNG projects generating $500 million in incremental EBITDA by 2026. That EBITDA target was later increased to $510 million. In 2022-23, Waste Management spent over $700 million on renewable energy capital expenditures, and management had earmarked an additional $450 million for 2024-25. In our view, these investments would further monetize the firm’s valuable landfill footprint while bolstering its environmental, social, and governance standing. However, we caution that management’s financial projections depend on prices of natural gas and renewable identification numbers, which can be volatile.