Q3 Earnings

Covanta closed out Q3 with a sense of ongoing momentum buoyed by "record production" at many facilities, rising waste prices and ongoing moves to strengthen the company's physical infrastructure. While energy prices continue to remain less reliable than before, Covanta has numerous initiatives underway that it believes can build the foundation for a strong long-term position.

Competitive Landscape

• Covanta's recent acquisition of two long-term WTE contracts in Florida's Palm Beach County for $46 million is expected to add $60 million worth of service revenue and 1.7 million tons per year. CEO Stephen Jones called this a "very good deal," in part because Covanta already has multiple facilities in Florida. The company also signed a new five-year contract extension for a facility in New York.​

• Covanta's Environmental Solutions division also continued to generate more revenue, up to $36 million for Q3, and is growing via a $4 million tuck-in deal in Toronto, Ontario. 

• Jones was neutral about the recent Wheelabrator acquisition. "I don't see any impact," he said. "Wheelabrator has always been a good competitor. They'll continue to be a good competitor under the Macquarie Infrastructure Partner ownership." Jones also sought to clarify the strict division between Macquarie's Green Investment Group (GIG), which became one of Covanta's financial partners earlier this year.

With ongoing signs of organic growth, Covanta's positive streak carried through the third quarter. As Covanta continues to look for ways to maximize its higher value profiled waste business, while also making strategic decisions about potential facility closures, it expects this trend to continue.

Jones said this means the company will identify "those plants where we get the highest returns and make sure that those plants are running in peak form" by directing maintenance attention to them. For plants on the cusp of that return criteria, such as one Covanta operates in Long Beach, California, investment may be worthwhile if a contract extension can be negotiated. Or sometimes it may mean outright closure, such as in Warren, New Jersey. According to Jones, the company is currently reviewing "a couple" more facilities that might fall into that category of deciding whether to "make them better or to sell them effectively."

Along with ongoing plans to begin construction of a new metals recovery facility in Pennsylvania next year, which will boost the company's overall growth in metals recycling revenue, multiple tacks are being taken to strengthen the U.S. portfolio. While Jones did note there were "several projects" being considered in the U.S., mainly expansions of existing facilities, Covanta still sees far more opportunity abroad.

UK and Beyond

• Jones reported the company is "very pleased" with performance at its new Dublin facility and outlined additional U.K. activity. Covanta announced it plans to take an equity stake in a new project from Brockwell Energy in Scotland, backed by GIG. The Earls Gate Energy Center is in advanced development stages, with permits approved, and expected to begin construction sooner than other Covanta projects.
• Those other sites are still progressing, but not as far in the development cycle. The Rookery project, which has become the subject of a court case over its environmental permit, is still expected to achieve financial close in 2019. Two other projects being done in partnership with Biffa, Protos and Newhurst, are awaiting permits.
• Jones also revealed Covanta passed on an Australian deal that was recently announced by Veolia because the returns "didn't seem to make sense." He said Covanta continues to look into opportunities from all over — China, Southeast Asia, India, the Middle East, Latin America — but the company is selective and ideally looking for multiple projects in a particular region.

Looking Ahead

• Heading into 2019, energy prices are still expected to be less reliable. While energy revenue was up for the quarter YoY, pricing was down and efforts are ongoing to reduce market exposure. Covanta is planning to hedge 2.4 MWH of energy for 2019.
• In addition to the Pennsylvania metals project, Covanta is planning large capital expenses for the opening of a second marine transfer station owned by New York's Department of Sanitation. So far, $9 million of a planned $35 million has been spent on this 20-year export contract that includes another site already in operation.
• Along with the usual talk of preliminary 2019 expectations, the big number that Covanta's executives kept coming back to was building free cash flow up to $250 million by "the middle of the next decade." CFO Brad Helgeson said "we believe that our steady progress on key strategic initiatives both this year and next is important building blocks towards that goal."