Covanta Reports Updates on UK Projects, Outlook for 2020

The company processed 21.4 million tons of waste at EfW facilities, a new annual record for Covanta that was driven by a full year of contribution from the Palm Beach, Fla., plant acquired in late 2018 and record production at 11 of its facilities, including several of Covanta's largest tip fee plants. It also processed an additional 700,000 tons at its material processing facilities.

Covanta’s 2019 EfW tip fee prices grew 5 percent same store, including 11 percent profiled waste revenue growth.

The company's EfW facilities produced a record volume of electricity, almost 10 million megawatt hours fleetwide.

The company reached construction stage on three development projects in the UK.

Covanta issued its fifth comprehensive Sustainability Report highlighting continued progress toward its environmental, social and governance goals.

Organic growth, excluding the impact of commodities, contributed $19 million, as higher waste prices and record EfW plant production outpaced lower construction revenue.

In 2020, organic growth, excluding commodities, is expected to contribute $5 million to $15 million, driven by strong EfW facility production, rising waste prices, growth in profiled waste volumes and increased metal recovery. Commodities are expected to weigh on the company's overall growth, with energy prices likely to be lower again in 2020, according to Brad Helgeson, chief financial officer at Covanta.

In 2019, Covanta saw a number of "meaningful waste contract extensions" and repricing, which will provide the company with some rollover benefits in 2020.

On a call with investors, Jones stated: "In the U.S., we remain in active discussions with multiple client communities that are interested in new or replacement EfW capacity. As seen across the world, the development cycles can be long, but we believe the investment of time and resources now will be well worth it when we see new capacity again in this country."

Long-term contract transitions were a $4 million headwind in 2019, primarily due to the roll off of debt service revenue previously earned under the company's service fee contract at the Babylon, N.Y., facility.

Transactions added $21 million to revenue, with the acquisition of the Palm Beach facility operating contract in late 2018 and the Q1 2019 startup of the Manhattan, N.Y., Marine Transfer Station partially offset by asset divestitures and the deconsolidation of the Dublin project for accounting purposes.

In 2019, Covanta grew its net regulated medical waste (RMW) revenue to its EfW plants by more than 40 percent, and in 2020, the company expects continued growth as it accelerates sales to newly permitted RMW capacity in its fleet.

The company continues to proactively manage its energy exposure, and it's entering 2020 with only 1.1 million megawatt hours exposed, a lower level than the company had historically.

On a dollar basis, more than 85 percent of Covanta's 2020 energy revenue is contracted or hedged. Included in its hedge revenue will be two more tranches of New Jersey basic generation service load that the company won in the most recent auction. According to Jones, "These incremental wins build on the program that we established in 2019 and provide price certainty and improve margins on approximately 500,000 megawatt hours annually through 2023."

In 2019, ferrous scrap was more than $75 per ton lower than the average price in 2018. In February, the index priced at $233 per ton, so Covanta expects full-year 2020 to average between $200 and $250 per ton. On the nonferrous side, scrap aluminum saw index prices slip by 27 percent on average in 2019.

On the call with investors, Jones noted the company's Total Ash Processing System (TAPS) is now commencing its startup and early commissioning activities. With the startup of TAPS, Covanta expects to further increase metal recovery and reduce the need for its residue to be disposed of in landfills.

Maintenance outlook: "When you look at our strong operating performance, our primary driver is our proactive use of resources to manage these facilities," said Jones. "Over the past few years, EfW maintenance spend has been flat, and, in the case of this year, down as we executed against our long-term maintenance plan. Over the next few years, pursuant to our long-term plans, we're focused on investing in our assets to ensure a continuation of our strong performance. Included in 2020's plan is the installation of a baghouse at our SEMASS facility, which is one of the largest and most profitable plants in our fleet. It sits in the Greater Boston area where waste prices are particularly strong, making it a crucial outlet for waste. It currently meets all emission control regulations, but the cost of maintaining the current particulate control system note as an electrostatic precipitator is increasing. As we look at the long-term future of the plant, it is the right time to make this an investment in newer technology. We expect that after installation, it will increase reliability and performance while reducing maintenance expense."