- Covanta is beginning to seek third-party value assessments for specific assets, with the potential to sell multiple facilities — either individually or as a package — depending on market demand. "Everything really is on the table to try to maximize the value of the company," said CEO Michael Ranger during a Friday earnings call.
- The move is part of a broader strategic review initiated under the new CEO, which is expected to produce tangible action items by mid-year. This will likely include a "leaner" expense structure, as in Ranger's view there has not been "enough scrutiny for capital allocation directed at the most profitable assets."
- Looking ahead, the U.K. is still seen as a key expansion area. Four projects under construction are now expected to provide upward of $110 million in annual earnings benefits once complete. Next up, the Rookery South Energy Recovery Facility site in England is on track to begin receiving waste later this year.
After experiencing a notable management shake-up last fall, following concerns about profitability and low share values, Covanta appears headed for clear changes in the coming months.
Ranger, a previous Covanta board member and co-founder of private equity firm Diamond Castle Holdings, said the strategic review is taking an extended period of time because of a "bottom up" focus on expense reduction, based on the needs of particular facilities and business lines, rather than a top down approach. Within the portfolio of 39 North American incinerators, he anticipated the two-thirds that are merchant plants (versus facilities operated via contract for clients) would likely merit the greatest capital allocation going forward. Larger plants with greater volumes are expected to be a focal point.
As for any future asset sales, Ranger said options remain open on potential buyers.
"Our assets fit a lot of categories so it depends upon where the value would come in," he said. "Clearly the nature of our business fits pretty well with private equity infrastructure-focused pools of capital. So that's clearly one alternative and then there are strategics in every line of our business, so we wouldn't want to discount that either."
The U.S. market's second-largest incinerator operator, Wheelabrator, is owned by a private equity division of Macquarie Group. A range of other companies could hypothetically be a fit depending on the type and price of assets Covanta chooses to market.
In the meantime, executives said they continue to adapt the existing business to evolving pandemic market conditions. Adjusted 2020 earnings before interest, taxes, depreciation and amortization (EBITDA) were $424 million, within pre-pandemic guidance. Free cash flow was $95 million, lower than 2019 due to heightened capital expenditures for plant maintenance. Tip fee pricing grew by 3%, which executives said came even amid a period of challenging logistics to source new volumes during pandemic disruptions.
Energy and recovered metals pricing both experienced ongoing headwinds, in what Chief Operating Officer Derek Veenhof described as "a very challenging year" for commodities. Looking ahead, the energy business is expected to remain stable and the company sees a potential $20 million to $30 million boost from metals revenue due to evolving market demands and expanding ash processing capabilities.
More broadly, Covanta pointed to evolving regulatory and corporate sustainability trends that may incentivize landfill alternatives as another potential tailwind. While Chairman of the Board Sam Zell's previously expressed a desire to "close all American landfills," this latest call largely focused on international growth.
Ranger described the U.K. as "one of the best markets in the world in terms of waste pricing and public support” for incinerators, with additional "attractive" development opportunities. The company's new Dublin facility also has room to increase profitability and Covanta is raising expectations for the next four sites to generate more than $60 million in combined annual free cash flow. After Rookery reaches full operation in 2022, the Newhurst and Earl Gate projects are on track to open in 2023, followed by Protos in 2024.
While many questions remain about what Covanta may look like in the coming years, pending potential asset sales or enhanced attention on certain business lines, executives repeatedly called out current steps already underway.
"We can now confidently point to a path of reducing our leverage before taking into account any actions resulting from the strategic review," said Chief Financial Officer Brad Helgeson, noting the example of a 2020 change in dividend policy yielding a new $90 million annual benefit.
For 2021, not including any potential changes from the review, Covanta anticipates adjusted EBITDA in the $435 million to $465 million range and free cash flow of $100 million to $140 million.