Q2 Earnings

Though Covanta reduced its 2019 free cash flow guidance by $20 million due to commodity challenges, executives sounded increasingly optimistic about the overall business in their Q2 earnings call. Waste volumes were up by 7%, tip fees were up by 5% and profile waste revenue was up by 8%.

"I've never felt more excited about the future for Covanta," said CEO Steve Jones.

Commodities and pricing

• Metals revenues were down $5 million due to low ferrous prices. Steel markets have been volatile in recent months, due in part to ongoing tariff battles, but more domestic demand is expected. Covanta executives also said new efforts to recover zinc from the nonferrous stream will help revenue.
• Energy revenues were down by $4 million, attributed to high natural gas production and lower demand in Q2 due to milder weather. Executives now anticipate the average 2019 energy price will be $26 per megawatt hour — $5 lower than expected — but maintain financial hedges can cover the situation.
• On a positive note, Covanta continues to see opportunities to raise tip fees — particularly in the Northeast. New contracts with Boston and Philadelphia were described as "bellwethers" for higher price points to come in those markets.

Covanta's Q2 results are the latest sign that energy and metals may be important parts of the business, but its core disposal assets are still more than capable of overcoming headwinds. Still, if they can be optimized both also present a chance to maximize the financial performance of a complex and sometimes expensive facility network.

In a May interview with Waste Dive, Covanta executives recognized energy was a secondary component of their business but outlined why incinerators are still seen as a more favorable source than landfill gas-to-energy projects. During the Q2 call, Covanta's leadership also laid out potential ways to get more creative with the energy business by pursuing opportunities to supply a microgrid in New Jersey, sell more steam in various regions and potentially power cryptocurrency servers.

Prices are now rising at a similar rate to landfill competitors — sometimes faster — as disposal capacity continues to shrink in many areas of Covanta's footprint. When factoring in that about 80% of Covanta's volume is contracted, meaning it can only rise at rates linked to inflation, the increase is described as having even more "magnitude." Covanta plans to continue looking for ways to utilize additional plant capacity for high-revenue profile tonnage such as medical waste.

"[W]aste prices are stronger than what we had expected going into the year. Obviously, we view that as a nice source of upside for us, but it's been even a little bit better," said CFO Brad Helgeson, while clarifying it still wouldn't change guidance. "It hasn't been better to the point where we felt compelled to adjust the ranges." 

Project updates

• Covanta completed the sale of two plants in Massachusetts during Q2. The Berkshire Eagle reports they went to a new company called Community Eco Power. "We've already been successful in addressing much of the low-hanging fruit so I don't expect that we'll be announcing any further reductions in our portfolio in the near term," said Jones.
• Equipment is beginning to arrive at Covanta's first Total Ash Processing System (TAPS) in Fairless Hills, Pennsylvania. Installation and commissioning will occur over "the next several months," with value expected to start coming in next year.
• Operating permits have been secured for Covanta's Protos and Newhurst projects in the U.K. Financial close is now anticipated for Protos in August or September (slightly later than planned) and judicial review is ongoing for Newhurst.

Looking ahead

• Covanta now anticipates having all four of its new U.K. projects under construction by the end of this year. Jones outlined numerous market factors he sees as generating further interest in expanding domestic infrastructure — including Brexit, a future organic waste disposal ban in Scotland and possible waste import restrictions in the Netherlands.
• For those reasons, Covanta anticipates more projects to come in partnership with Macquarie's Green Investment Group. Other projects discussions are also ongoing in the Phillippines, as well as in China.
• Despite near-term commodity factors, Covanta's executives pointed out their 2019 free cash flow guidance of $120-145 million remained unchanged and stood by a goal of achieving $250 million free cash flow within the next five years.