Standard and Poor’s predicts limited growth for environmental and waste management

New York, NY— Rising costs, slower volume and increased competition have combined to slow growth among companies in the solid waste management, water supply and treatment, air pollution, and environmental remediation sectors, and prospects for growth remain limited into 2006, said Standard & Poor’s in its semi-annual survey on the environmental services industry, published in October, 2005. These and other findings are available in the report, Environmental & Waste Management Industry Survey, published twice yearly by Standard & Poor’s.

Although Standard & Poor’s believes that solid waste revenue growth should gradually pick up during 2006, volume has remained soft in many regions, and the level of sustained economic growth remains uncertain, especially in the wake of Hurricanes Katrina and Rita. Despite a significant amount of debris from the storms, S&P does not expect the cleanup efforts to add much to earnings for the major haulers - namely Waste Management and Allied Waste Industries - as disrupted collection services, flooded landfills and soaring fuel costs will likely offset additional volume growth.

“These disasters will likely have a minimal, or even a negative, impact on the bottom line,” said Stewart Scharf, analyst with Standard & Poor’s Equity Research Services. “And faced with so many other issues like higher costs, slower volume and increased competitive pricing, companies are turning inward to improve profitability.”

In the solid waste management segment, Standard & Poor’s believes companies will continue to seek price hikes and surcharges to offset higher fuel costs, while investing in fleet upgrades and worker safety programs. As a result, the segment is likely to report modest revenue growth in 2005 and into 2006. With many municipalities experiencing budget shortfalls, S&P expects more privatization and a focus by state and local governments on improving recycling rates. And with solid waste volume growth expected to continue to slow, the pricing divide is likely to increase between less competitive, rapidly expanding regional markets and more sluggish, competitive markets.

Standard & Poor’s anticipates continued growth for water utilities based on customer base expansion and rate hikes. Water is a commodity that is in great demand, and aging systems need to be upgraded. In turn, municipalities are looking to publicly-traded water utilities for assistance in owning or operating their systems; these publicly-traded utilities can better operate and upgrade the water infrastructure systems and seek rate hikes from state commissions to cover the capital improvement costs. The EPA recently projected that $277 billion would be needed over the next 20 years to upgrade and maintain U.S. water infrastructure systems. S&P expects further consolidation in the industry.

The failure to pass dramatic emissions legislation in 2005 likely means only limited growth for providers of air pollution control equipment. However, more stringent regulations for both industrial and vehicle emissions, and the recent passage of a new energy bill, should improve air quality levels. Emissions controls are being required for trucks and other vehicles over the next few years, while a rise in hybrids should continue to reduce fuel consumption and air pollution.

Any growth in environmental remediation is likely to remain extremely limited unless substantial changes are made to the Superfund program.