Week 5 - Milestone 2 - Risk Analysis

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Week 5: Milestone 2 – Risk Analysis 1 Milestone 2 – Risk Analysis of CNG Trucks FIN 685 Professor Warren Wright Southern New Hampshire University Nicole Johnson January 13, 2024

Week 5: Milestone 2 – Risk Analysis 2 Waste Management and Republic Services are both striving to convert their trucks or assets from a financial standpoint to compressed natural gas (CNG) rather than running on diesel or gasoline. There are risks with transferring everything to CNG, but it burns cleaner and is more environmentally friendly than fossil fuels. There are risks and drawbacks to swapping everything to CNG that we will explore throughout this paper, as we will also explore the positives CNG brings along. The risk that these companies face trying to turn their assets into more environmentally friendly modes of transportation is the amount of travel that they are cutting out because CNG doesn’t get the same mileage that a diesel truck would, the tank capacity is smaller, therefore they cannot travel as far. This also means that they cannot service as many customers in a day as they could with fossil fuel-run vehicles, so this cuts into profits. Refueling stations are few and far between as well creating more hardships for the companies that are converting to CNG. CNG refueling stations are an expensive investment as well, so they are a large decision to invest in, knowing in turn that the trucks won’t perform as well as fossil fuel trucks. Since the performance is less, a need to increase the trucks in the fleet, which increases the manpower needed to run additional trucks. This all factors into the bottom line, the initial start-up cost for the conversion is millions of dollars. Converting a vehicle can cost anywhere from $8,000 to $50,000 per vehicle depending on the vehicle (DaSolarEnergy.com, 2023). The cost of the refueling infrastructures is upwards of $1.8 million depending on the size and application (U.S. Department of Energy, 2023). However, the longevity of the CNG trucks and the fact that CNG is less expensive than fossil fuels, the cost-savings in the long run make the transition worth it. CNG vehicle engines last longer than of conventional fossil-fuel vehicles, so

Week 5: Milestone 2 – Risk Analysis 3 they will have a longer time in use than a traditional vehicle, and repairs are usually less because the fuel burns cleaner causing less buildup that leads to failures. The risk of spending all the money upfront to convert everything to CNG is a market risk in my opinion, because if the market for CNG fails, then you are risking your profits. There are a lot of factors that play into the conversions, especially for those locations that run their CNG from the gases produced from landfills. If the hauling companies are operating from the gases produced by the landfill, they are taking a risk that the landfill will remain operational and meet all permitting requirements. There is also the risk that pipelines break or get hit during operation that could interfere with the production of the gases or interrupt the flow causing the refueling station to be temporarily out of service, and a backup plan for that instance could be costly. Even though CNG fuel is cheaper than fossil fuels, the need to have a backup plan if the dependency is on landfill gases is additional overhead that must be accounted for, and if not used promptly, could expire and be a waste of investment. External environmental risks would be the competition, economic trends, and availability of resources. Competition is a factor because the ability to pick up the customers’ trash on time matters, and if the trucks cannot travel the same distance as a competitor’s truck, they might lose turn times and lose business because of the inability to meet deadlines due to the extra refueling that might factor into the transition from fossil fuels to CNG. The economic trends of being more environmentally friendly and pushing to preserve the natural resources that we have left is a push as well and jumping on the bandwagon of “going green” is important to companies such as Waste Management and Republic Services. Go Green is actually and WM slogan and push to be more environmentally friendly and considerate.

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Week 5: Milestone 2 – Risk Analysis 4 Internally the risks are going to be the people mainly, being able to hire the manpower to run the additional trucks and make the fleet large enough to factor in the mileage loss for servicing customers. The process of it all will be a change as well that would be a factor because the additional training on the vehicles because they perform differently from that of a standard fossil fuel vehicle, and the maintenance is different, so there would be additional training needed for drivers, and mechanics for the repair side of the trucks as well. Overall, the initial start-up cost to purchase the conversion kits to convert the trucks or the purchase of already converted trucks, the refueling infrastructure, additional training for staff, and additional staff for the increase in trucks, is a blow to the bottom line to balance out the costs and still turn a profit, however, the amount of savings long term cannot be ignored. The savings in the fuel alone, and the longevity of the vehicles means the asset will produce longer before needing to be replaced, and maintenance costs are lower because the fuel burns cleaner causing fewer mechanical issues. Long term, the investment in the CNG truck fleet is worth the savings in maintenance and fuel expenses. The opportunity for jobs this brings is a worthy investment as well because people become an asset to the company. The risk management techniques that would be beneficial in this exchange would be retention and loss prevention. The retention of employees would cut down on training costs because they would not have the turnover and must continually give the same training to employees. If retention becomes a focus, then each truck has one handler for longer periods, which decreases the chances of issues, because they are going to know the truck and be able to handle the asset better which leads to loss prevention/reduction. Management strategies that lead to retention are leaders that lead by example and praise. Instead of focusing on the negative things that employees do, focus on positive reinforcement

Week 5: Milestone 2 – Risk Analysis 5 and that tends to motivate employees more than always being yelled at or having their mistakes pointed out. Attract more flies with honey than vinegar. Having managers that get in the trenches as well and do the work with their employees makes them more relatable and easier to go to with problems as well. CNG trucks are a great alternative, but they are going to increase the manpower needed to be able to continue to service the same number of customers to maintain the profits. They are going to increase the employees needed, which is going to help grow the opportunities to build relationships with customers because if you staff with the right people, they can help build relationships with customers, which is going to potentially increase profits because customers like working for people first companies that care about their jobs, and services provided to the customers. Retention is going to be key to keeping these relationships built because customers like to get to know people and work with the same people. Long-term savings for the cost of CNG fuel versus the cost of fossil fuels and the maintenance savings for CNG vehicles outweigh the upfront costs for the conversion. Being that WM and Republic Services are environmentally friendly and trying to find solutions to better the environment, for them to lead the way with the CNG conversions makes sense and plays into their business models. Choosing options that follow their business models makes the businesses more appealing to customers as well, because they stay true to their roots as a business, and then customers will appreciate the honesty. Trying to be environmentally sound as well leads to better business, because we all have to live in this world, so taking action to make it a better place to live is an incentive as well for a business. CNG vehicles offer better fuel efficiency compared to diesel vehicles, CNG vehicles have a higher initial investment, but the lower fuel costs make them cost-effective in the long run, CNG is a cleaner fuel option, contributing to reduced

Week 5: Milestone 2 – Risk Analysis 6 pollution and improved air quality, producing 25% fewer carbon dioxide emissions, CNG has a higher octane rating than gasoline, making it more efficient, and CNG vehicles can achieve 30% saving in fuel consumption compared to their diesel counterparts (US Energy Solutions, 2023). Over time the risk vs. return is important to weigh and in the instance of WM and Republic Services, the transition to CNG fleets return outweighs the risks. The companies can take time to build their fleets over periods, so they don’t have to make the investment all at once, other than the refueling stations, those are an upfront cost that is a starting point that needs to be taken, however, the addition of trucks to the fleet can be stretched over some time and taken slow. This will allow the businesses to build a plan to account for the increase in cost over the next 3 to 5 years to build up to a full CNG fleet. Building a business plan to account for the increased initial spending to convert the trucks and calculate the cost savings the changes bring over time is going to be beneficial. The forecast can be built to show investors the cost savings that this investment into the CNG fleet is going to bring to the business. The risk of transferring the vehicles does not outweigh the rewards the transition is going to bring, from the fuel cost savings to the emissions that are being cut down upon to benefit the environment, not only will investors be happy with the returns, but customers and community members will respond positively as well which the positive press about the changes brings on new business opportunities.

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Week 5: Milestone 2 – Risk Analysis 7 References: Automovill Technologies. 2023. Advantages and Disadvantages of CNG. Retrieved on January 11, 2024, from https://www.automovill.com/blog/advantages-and-disadvantages-of-cng DaSolarEnergy.com. 2023. CNG Conversion. Retrieved on January 11, 2024, from https://www.dasolar.com/wind-power/cng-conversion#:~:text=Conversion%20costs %20can%20start%20at,It%20depends%20on%20the%20vehicle . US Department of Energy. 2023. Alternative Fuels Data Center. Retrieved on January 11, 2024, from https://afdc.energy.gov/fuels/natural_gas_infrastructure.html US Energy Solutions. 2024. CNG vs Diesel Examining Fuel Efficiency and Operating Costs. Retrieved on January 11, 2024, from https://energy5.com/cng-vs-diesel-examining-fuel- efficiency-and-operating-costs Yu, Jea. 2023. 5 Basic Methods for Risk Management. Retrieved on January 14, 2024, from https://www.investopedia.com/articles/investing-strategy/082816/methods-handling-risk- quick-guide.asp