Q1 Earnings

Covanta reported positive first quarter results, generating $84 million of adjusted EBITDA and $6 million of free cash flow. The company processed 5.2 million tons in Q1 — a 7% increase over the previous year and a product of strong plant operations and portfolio expansion, according to CEO Steve Jones.

"We are executing well on our 2019 plan," Jones said during the company's earnings call. "And our financial outlook for the year remains unchanged."

Continued Growth

• Jones highlighted expanding market demand for "sustainable non-landfill solutions" — especially in light of tightening regional disposal capacity — noting that conditions are aligning more favorably for potential expansion along the East Coast. "[W]e are beginning to see early signs of interest by a few of our clients in adding new domestic EfW capacity," said Jones​. "We noted development cycles are long, but we see these early discussions as encouraging, and we are uniquely positioned to participate in these opportunities."
• At the same time, Covanta is paring down its U.S. infrastructure. The company recently closed its Warren County, New Jersey incinerator and reached an agreement to divest two more in Springfield and Pittsfield, Massachusetts during Q2. "While all three plants were well-run, they suffer from relatively small sizes, and we saw limited opportunities for improved economics under our ownership," said Jones, adding that Covanta still has "a few underperforming plants" to address.
• The company also continued overseas expansion with the financial close of its Rookery project in England late last month — a "critical milestone," according to Jones. "It is the biggest of the four projects we’ve announced so far and we expect it to process around 545,000 metric tons of waste annually," he said. Commercial operations are projected to commence in 2022.

While the UK market remains active for new developments, the U.S. market has been stagnant for years — it's become far more common to hear about aging facilities shutting down than about new projects receiving serious consideration. While any new Covanta facility in the U.S. remains years away, factors may be aligning in the company's favor.

From an end market perspective, Covanta's "number one focus remains the waste markets," according to Jones: "[W]e continue to benefit from a strong disposal price environment. Waste flows remain robust, transportation infrastructure stretched, and our attractively located assets have flexibility to capture price increases." While New England has traditionally been perceived as a "particular source of strength," Jones observed pricing improvement to be "fairly broad-based throughout our footprint of merchant plants."

With Wheelabrator issuing similarly sanguine comments about long-term prospects during the recent NAWTEC conference, it appears the WTE industry foresees a different future for itself than opponents' oft-spun narrative of an industry in decline.

Project Updates

• Covanta began operations at the New York Department of Sanitation's East 91st Street Marine Transfer Station (MTS) in March — the second of two MTS sites under a 20-year contract. The facility is ultimately expected to deliver 170,000 tons annually for processing at Covanta's Delaware Valley and Niagara sites, granting Covanta roughly one-third of the city's residential waste.
• The company recently signed a new 15-year disposal contract with Babylon, New York. The agreement transitions from a service fee contract structure to a tip fee structure, giving the company a greater share of energy revenue as well as opportunities with metals management and merchant disposal capacity.
• Equipment for Covanta's first Total Ash Processing System (TAPS) is currently undergoing off-site testing before being delivered and installed in Fairless Hills, Pennsylvania around mid-year. The company is in early-stage discussions with clients for future investments at other sites.

Looking Ahead

• Tip fees were up over 5% overall YoY, said Jones — "even as nearly 80% of our tip fee waste is under contract." These increases, he noted, are a function of stronger spot markets, improved pricing as the company re-contracts and continued benefits from increasing volumes of profile waste. Full-year tip fee price improvement is expected to surpass 3%.
• Now that the Rookery project's legal challenges appear to be resolved, Covanta will shift focus to bringing its Protos and Newhurst projects to financial close and into construction (the Protos close could come as soon as June or July, according to Jones). Two of the company's four new U.K. projects are now under construction.
• Covanta's total planned investments across all four announced U.K. facilities remains $150 million to $200 million, which CFO Brad Helgeson expects "will end up entirely funded by the proceeds from the sale of the 50% stake in Dublin to [Green Investment Group] last year and the premiums that we’re earning from the UK projects that we developed as they reached financial close."
• According to Helgeson, the company's investments mean that leverage ratio isn't expected to improve — and may, in fact, tick up — in 2019. "This is not a debt paydown year for us," he said. "These are investments that we think are going to bear a lot of fruit for us going forward. What we would expect is to pivot back towards the trajectory of deleveraging, starting in 2020."