Q3 Earnings

Dive Brief:

• Covanta announced plans for a wholesale strategic review and multiple significant changes during its third quarter earnings call, including the departure of CEO Steve Jones. Board member Michael Ranger will now serve as CEO and president as the company rethinks its priorities.
• Sam Zell, board chairman, said Covanta's underlying business remains fundamentally strong but that "value has not translated to our stock price in a demonstrable fashion" meaning now "everything will be on the table for review." 
• Zell pledged a "pretty radical change in direction" that could potentially see the company changing operations, selling assets and/or focusing more on its U.K. business, even as Ranger said Covanta would not rule out new U.S. plants. Other senior personnel changes include the elevation of Derek Veenhof to COO, and Timothy Simpson to chief administrative officer. 

Dive Insight:

Covanta's stock has been viewed as a consistent underperformer by analysts, despite the integral nature of its assets in many markets, and the shakeup could lead to substantial changes for the industry's largest incinerator operator.

A director with Covanta since 2016, Ranger has served as chairperson of the board's Audit Committee and as a member of the Finance Committee. He has worked for years in private equity and the energy and power sectors, in addition to being co-founder and senior managing director of private equity firm Diamond Castle Holdings. Ranger was a board member for American Ref-Fuel, which Covanta acquired in 2005. He will earn a base annual salary of $1, with the option to purchase 1 million shares of Covanta's common stock.

Ranger's appointment signals the exit of Jones from both the board and the top job. Jones joined Covanta as CEO in January 2015, coming from a long run in senior management roles at Air Products and Chemicals. Areas of focus during his tenure included expanding revenue under the Covanta Environmental Solutions division, launching new facilities in the UK and building out more capabilities for metals recovery from ash, among other areas. Waste Dive interviewed Jones in 2016 and 2017.

Other changes include the exit of Executive Vice President of Supply Chain Michael de Castro, who worked with Jones at Air Products and was CEO of Interstate Waste Services before that. 

The shake-up comes after Covanta reported second quarter revenue declines due to dips in commodity markets, along with pandemic effects on areas like commercial waste and profile waste. Covanta has struggled during the pandemic and was among the first companies to institute cost-saving measures in April, when it cut its dividend, saving $90 million. The company also introduced temporary compensation reductions for top leadership, along with furloughs and a hiring freeze, as part of an estimated $18 million in cost savings so far this year. 

CFO Brad Helgeson said the company has "maintained its focus" during the pandemic and is seeing more activity come back online in regions like the Northeast. The company has "navigated this difficult environment impressively," Helgeson said, citing a new contract in New York and "signs of recovery" in the automotive sector as reasons for optimism.

Executives said the company is increasingly focused on its international business, with board member Owen Michaelson moving to become president of Covanta Europe in January. Three facilities are under construction in the U.K., including Covanta's Rookery project which is on schedule for commercial operations in 2022. Construction on the Earls Gate project has also resumed following a pause due to COVID-19, while the Newhurst project is on track for commercial operations in 2023. Financial close on the separate Protos project is expected by the end of 2020, with the possibility of more facilities in the future.

U.S. opportunities for waste-to-energy have been limited and the company was prioritizing ways to maximize its existing assets, while shedding others. After selling its interests in a Washington hydroelectric project to Atlantic Power Corporation in 2018, Covanta closed its Warren County, New Jersey, incinerator and divested two more Massachusetts facilities in 2019. 

Further divestment of assets or business lines could continue, based on Zell's comments during the call. He repeatedly described Covanta's portfolio as one where a minority of assets are driving strong profits, while the rest were less lucrative, and forecasted plans to rationalize that mix.

“We’re not taking anything off the table, we think there’s a great opportunity here. We like the quality of the assets we have, we’re not packaging them as well as we should be," said Zell. "We’re changing management here with the goal of reaching those objectives."

No specific timeline or scope has been set for the strategic review process, but Covanta anticipated being able to share more information during the fourth quarter earnings call in February. Based on Ranger's experience restructuring multiple other companies, he discussed how the sale of unspecified assets could help Covanta rationalize its capital structure and said there will be “some pretty tough decisions about what assets to focus on and what assets will take us to the future."