Q1 Earnings

Dive Brief:

• Covanta's strategic review process is complete, and the company's North American portfolio will be changing. “We have now identified a number of sites where we intend to shutter operations over the next several years, including several public sector operating contracts where we have already notified our clients that we do not intend to extend contracts when they expire," said CEO Michael Ranger during a Friday earnings call.
• The company also identified the potential for $30 million in annual cost reductions by 2023, with some starting this year due to voluntary early retirements. This does not include any potential asset divestitures, which remain under consideration.
• Looking ahead, the company projected it could achieve $600 million of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) and $250 million of free cash flow by 2024. Driving the projections, in part, is the company's ongoing expansion overseas, with its new Rookery South energy recovery facility set to begin receiving waste in the U.K. soon.

Dive Insight:

Following the announcement of a wholesale strategic review and new leadership six months ago, Covanta offered some of its most specific comments yet on what may be coming next. 

Ranger broke the business down into four key components under assessment: the 21 facilities Covanta owns in North America, the 18 it operates for public-sector clients, the Covanta Environmental Solutions division and the five active or pending projects the company partially owns in Ireland and the U.K.

While Covanta has shut down or divested facilities it owns in the past, and it could do so again, much of the discussion centered on sites it operates under contract.

Chief Operating Officer Derek Veenhof's team is in discussions with all public-sector clients about the potential for contract renegotiations or extensions. The primary goal is to reduce Covanta's capital expenditure responsibilities. 

“We want each individual facility to be able to stand on its own two feet from a contractual perspective, so that each is positively contributing incrementally to the overall value of the company," Ranger said.

An estimated 35-40% of the facilities on that list have contract expiration dates within the next five to seven years. Covanta declined to identify how many contracts it has already decided to let expire.

"We can’t share specific details at this time, but I would note that even if we do not extend on current terms of an operating contract, every client has the opportunity to approach us and renegotiate," said spokesperson James Regan via email.

As for potential divestitures, Ranger said the company's leverage issues weren't necessarily acute enough to make this a necessity, but discussions remain ongoing. Covanta Environmental Solutions repeatedly comes up as one potential sale being shopped around, based on reports from financial analysts, comments during a March GFL Environmental investor call and a report by Dealreporter via Seeking Alpha.

In the meantime, Covanta reported positive first-quarter results, including 4% year-over-year tip fee growth and revenue up in all categories except for waste volumes. The latter result is due to planned maintenance and will be offset in future quarter, the company said. Metals revenues were up notably, due in part to higher ferrous volumes, and energy prices were boosted by a cold winter in the Northeast. Veenhof noted commercial and profile waste volumes are also normalizing toward pre-pandemic levels, calling out the "very good opportunity to realize further price growth" given the "limited and declining landfill capacity in our core markets."

Guidance for 2021 was also raised, to a high end of $480 million for EBITDA and $155 million for free cash flow, and Chief Financial Officer Brad Helgeson outlined expectations for greater cash flow as the U.K. portfolio comes to fruition. Following Rookery reaching full operational status next year, Covanta anticipates two facilities coming online in 2023 and another in 2024. It is also seeking permit approval to expand capacity at a Dublin facility and exploring additional opportunities for new projects.

Possible acquisitions have also not been ruled out as part of the company's rethink, though executives said it's still unlikely Covanta would consider a vertical integration strategy – like competitor WIN Waste Innovations – and try to enter the collection business. As for whether any divestitures or other options have been taken off the table, Ranger said the situation is fluid and announcements could be coming throughout the year.

"Nothing's been eliminated to this point, and we're in the phase of having more facts in front of us to evaluate, whereas before in our discussion at the end of October it was more instinctual," Ranger said. "We’ve gotten lots of confirmation on some of our original thoughts and some other eye-opening alternatives."