Charah Solutions, Inc. (CHRB) is a leading national service provider of mission-critical environmental services and byproduct recycling to the power generation industry. The company's comprehensive suite of offerings enables its customers to address the ever-evolving challenges related to the remediation of coal ash ponds and landfills at open and closed power plant sites, while ensuring the continuous supply of necessary electric power to communities nationwide.

Business Overview and History

Charah Solutions was incorporated in Delaware in 2018 in connection with the company's initial public offering in June of that year. However, the company's history traces back to 1987 when it was originally founded. Since its inception, Charah Solutions has continuously worked to anticipate its customers' evolving environmental needs, increasing the number of services it provides through its embedded presence at their power generation facilities.

Over the years, Charah Solutions has built a reputation as a partner of choice for the power generation industry due to its quality, safety, domain experience, and compliance record - all of which are key criteria for its customers. In 2022, the company performed work at more than 40 coal-fired generation sites nationwide. Charah Solutions operates as a single operating segment, providing a suite of remediation and compliance services, byproduct services, raw material sales and Environmental Risk Transfer (ERT) services to its utility partners.

In 2022, Charah Solutions faced significant challenges, including inflationary market pressures impacting its supply chain, labor and subcontractor markets. The company had to navigate a tight and competitive labor market, as well as supply chain disruptions related to delays in receiving materials and equipment and increased logistics costs. These factors put pressure on the company's profitability and cash flow during this period.

Financial Overview

Charah Solutions' financial performance has been impacted by a variety of factors in recent years. For the first quarter of 2023, the company reported total revenues of $70.91 million, with construction and service revenue accounting for $61.85 million and raw material sales contributing $9.07 million. The company's gross profit for the quarter was $6.03 million, representing a gross profit margin of 9.8%. Charah's operating loss for the quarter was $1.08 million, and its net loss attributable to Charah Solutions, Inc. was $6.09 million.

The company's profitability has been influenced by a range of factors, including the timing and execution of large-scale remediation projects, fluctuations in the demand for its byproduct services and raw material sales, and the integration of its recent ERT acquisitions. Charah Solutions has also faced inflationary pressures in its supply chain and labor markets, which have challenged the company's ability to secure new contracts and maintain margins.

Despite these headwinds, Charah Solutions has demonstrated resilience in its business model. The company's diverse service offerings, long-standing customer relationships, and technical expertise have positioned it as a leader in the environmental services industry. As of the latest reporting period, the company's financial ratios include a current ratio of 0.97, a quick ratio of 0.93, and a debt-to-equity ratio of -5.81.

Financials

Charah Solutions' financial performance has shown some improvement in recent quarters. For Q1 2023, the company reported revenue of $70.91 million, representing a year-over-year growth of 7.4%. However, the company still faced challenges, with a net loss of $6.09 million for the quarter. Operating cash flow and free cash flow figures for the quarter were not provided.

Liquidity

The company's liquidity position, as indicated by its current ratio of 0.97 and quick ratio of 0.93, suggests that Charah Solutions may face some challenges in meeting its short-term obligations. The negative debt-to-equity ratio of -5.81 indicates that the company has more debt than equity, which could potentially impact its financial flexibility and ability to raise additional capital if needed.

As of March 31, 2023, Charah Solutions had $11.88 million in cash. The company has a $30 million asset-based lending credit agreement, of which $8.5 million was drawn as of March 31, 2023. The credit agreement also provides for $5 million in available letters of credit, which enhances the company's financial flexibility.

Operational Highlights and Challenges

Charah Solutions' operational performance is heavily dependent on the successful execution of its large-scale remediation and compliance projects. The company's ability to effectively manage project timelines, control costs, and deliver high-quality services is crucial to its financial success.

In December 2022, the company encountered a significant challenge when it was notified by a whistleblower of improper spending activities at one of its project sites. The ensuing internal investigation substantiated the allegations. Charah Solutions is continuing to investigate the extent of the fraudulent activities, which could result in a material loss. This incident has led to the reversal of $2.48 million in revenue, representing management's best estimate of the probable loss. The company continues to collaborate with external law enforcement agencies and evaluate the extent of insurance coverage available for reimbursement.

Despite this setback, Charah Solutions has maintained its focus on operational excellence, safety, and environmental compliance. The company's commitment to these core values has been instrumental in securing new contracts and retaining its long-standing customer relationships.

Service Offerings

Charah Solutions operates through a single reportable segment, offering a comprehensive suite of services to its utility partners:

1. Remediation and Compliance Services: These multi-year services address environmental improvement and sustainability initiatives, driven by regulatory requirements, customer initiatives, or consumer expectations. They include designing, constructing, managing, remediating, and closing ash ponds and landfills on customer-owned sites.

2. Byproduct Services: This involves recycling recurring and contracted volumes of coal-fired power generation waste byproducts, such as fly ash, bottom ash, IGCC slag, and gypsum byproducts. The company also manages coal ash, which is critical to power plants' daily operations.

3. Raw Material Sales: Charah provides customers with essential raw materials and manages the sourcing, logistics, and transactions globally.

4. Environmental Risk Transfer (ERT) Services: This innovative solution addresses coal-fired plant energy providers' evolving plant closure and environmental remediation needs, managing sites' environmental requirements while benefiting communities and reducing costs for energy providers.

More than 90% of Charah's services work is based on time and materials, cost reimbursable, or unit price contracts, which helps reduce the risk of loss on contracts and provides gross margin visibility.

Outlook and Future Prospects

Looking ahead, Charah Solutions remains cautiously optimistic about its future prospects. The company's leadership has implemented cost-saving strategies and is actively pursuing a plan to refinance its credit agreement before the current maturity date. Additionally, the recent announcement of a definitive agreement for the company to be acquired by SER Capital Partners is expected to bring the necessary funding to support Charah Solutions' ongoing operations and future growth initiatives.

The power generation industry's increasing focus on environmental liability management and regulatory requirements continues to drive demand for Charah Solutions' services. The company's broad service capabilities, technical expertise, and proven track record position it well to capitalize on these industry trends.

However, the company's ability to navigate the complex regulatory landscape, manage inflationary pressures, and maintain operational efficiency will be critical to its long-term success. Charah Solutions' management team is committed to addressing these challenges and positioning the company for sustainable growth in the years to come.

Conclusion

Charah Solutions, Inc. (CHRB) is a vital player in the environmental services industry, providing mission-critical solutions to the power generation sector. Despite facing recent operational and financial challenges, including the ongoing investigation into fraudulent activities at one of its project sites, the company has demonstrated resilience and a steadfast commitment to its core values. The company's diverse service offerings, including remediation and compliance services, byproduct services, raw material sales, and innovative ERT services, provide a strong foundation for future growth.

As the industry continues to evolve, Charah Solutions is well-positioned to leverage its comprehensive service offering, technical expertise, and long-standing customer relationships to drive growth and create value for its stakeholders. However, the company must navigate its current financial challenges, including its debt position and the potential impact of the fraud investigation, while continuing to capitalize on the growing demand for environmental services in the power generation industry.