Waste Connections Grows Through Acquisitions

Waste Connections, an integrated solid waste services company, is expected to continue to grow through acquisitions due to the company's nominal internal growth in core revenue, notes Moody's Investors Service. Acquisitions account for 83% of Waste Connections' revenue growth over the last twelve months ending June 30. As the company's internalization rates--the amount of trash that goes into the company's land fills--and cash flows continue to improve, an increasing amount of acquisitions are expected to be financed with cash, states Moody's. "The higher the internalization rate, the higher the margins, and the more you have effectively locked in your business," Steven Bouck, Waste Connections cfo, explained.

Waste Connections is pursuing a refinancing that will improve its liquidity (see story, page 3). This refinancing includes a $350 million revolver and a $150 million term loan to which Moody's has assigned a Ba2 rating. Moody's upgraded Waste Connections' outstanding $241 million of bank debt to Ba2 from Ba3 based partly on the company's resilient revenues and profits and improved cash generation. Through the use of fuel hedges and higher internalization, Waste Connections has been able to maintain profit margins in the face of increasing insurance, fuel and labor costs. In addition, Moody's also takes into account the company's ability to maintain its business franchise mix. Roughly half of Waste Connections' business is either contractual or franchise, which essentially guarantees revenue, Bouck noted.

But the aggressive acquisition-based growth strategy comes with its own inherent risks. Negative tangible net worth for Waste Connections was approximately $104 million at the end of June. But balance sheet improvements are anticipated in the future with improving cash flow generation and revenues. Although financial leverage is still high, Moody's explains that improved cash flow generation will result in deleveraging. Increasing operating profits should also boost rising interest coverage, measured by EBIT to interest expense, from 4.2 times.