Covanta Holding Corporation provided the following business and capital allocation update in light of the current operating environment and economic uncertainty created by the COVID-19 pandemic.
"I couldn't be more proud of our team and its ability to continue to provide the highest level of service to our customers in this most challenging environment," said Stephen Jones, president and CEO of Covanta, in a statement. "The health and safety of our employees is crucial, and we have put in place numerous protective protocols to ensure their ability to work safely. At the same time, we are mindful of the economic challenges the pandemic has brought, and we are taking decisive steps to reduce overhead and discretionary costs to ensure the company operates efficiently in the current environment and is positioned to thrive in the future."
"Covanta is a resilient company with critical infrastructure assets that provide essential services under long-term contracts. The board believes that the company's operating and growth strategies, along with a robust ongoing return of capital, represent the best path for maximizing long-term value for our shareholders," said Sam Zell, chairman of the board at Covanta, in a statement. "In assessing capital policy, we believe that a more balanced allocation of internally generated capital among near-term shareholder returns, growth investments and accelerated balance sheet improvement is more appropriate, both in the current uncertain environment and over the long term. The board will continue to review this policy to ensure the business is optimally capitalized and has sufficient capital to grow, while maintaining meaningful distributions to shareholders."
Critical Waste Infrastructure
Covanta's 41 waste-to-energy (WTE) plants and 20 material processing facilities provide a vital service to its municipal and commercial clients. As waste disposal facilities, they are recognized as part of critical infrastructure by the Department of Homeland Security and as essential services by all relevant state and local governments. There has been no interruption to service, and Covanta remains a primary waste outlet for numerous municipalities and commercial customers. Residential waste represents the substantial majority of the company's contracted volumes, and there has been little reduction in these volumes to date. Covanta also process commercial waste at many facilities, and while commercial volumes from some customers have fallen, the company is accessing alternative waste sources and will continue to manage waste inflows to minimize financial impacts.
Three of Covanta's WTE facilities are currently permitted to accept regulated medical waste (RMW), and the company has begun receiving COVID-19 infected material. With combustion at 2,000 degrees Fahrenheit, WTE is an efficient and environmentally compliant solution for this waste, according to Covanta. All facilities that accept RMW have specialized equipment to handle these materials, as well as incremental protocols and procedures to minimize contact.
In the UK, most of Covanta's construction activity is continuing, and it's working to mitigate any potential impacts. In England, construction activities are considered essential, and Covanta's Rookery and Newhurst sites are adhering to guidance set by Public Health England and are currently proceeding on schedule. However, the government in Scotland has taken a different approach, and construction at Earls Gate has recently been halted. Further updates to any potential changes in project timing will be provided as appropriate.
Focus on Employee Health and Safety
Covanta has adopted a number of incremental protocols to ensure the safety and wellbeing of the workforce. Since March 16, all corporate and field administrative employees have successfully transitioned to working from home while essential plant employees continue to report to their facilities. At the facilities, incremental safety procedures include a reduction of visitors and cancellation of all tours; increased usage of personal protection equipment and sanitizing products; enhanced protocols for social distancing and frequent disinfection of commonly used areas; and temperature checks of all employees and contractors before starting work each day. All protocols follow guidance by the Centers for Disease Control and Prevention, and Covanta will continue to update these programs as needed.
Initiatives to Proactively Reduce Costs
In light of the uncertainty around the potential financial impacts of COVID-19, Covanta has established a goal of reducing 2020 costs by $15 million to $30 million, undertaking several programs:
- Eliminating all non-essential travel and significantly reducing discretionary spend.
- Enacting a hiring freeze for new corporate employees.
- Lowering compensation through a 50 percent reduction in CEO wages, a 25 percent reduction in executive leadership wages and a 20 percent reduction in wages for all corporate support employees through a combination of wage reductions and furloughs. These measures are initially expected to remain in place for the next 12 weeks.
- Lowering Board of Directors' fees by 60 percent during the same time period as management salary reductions and furloughs.
In addition to these new cost initiatives, a portion of the company's annual incentive compensation plan is tied to adjusted EBITDA and would automatically adjust downward in response to lower adjusted EBITDA relative to targets, providing an incremental cost reduction.
Growth investment for 2020 is expected to be primarily focused on UK projects and the start-up of Covanta's first Total Ash Processing System. The company will remain highly disciplined in making any additional discretionary investments this year.
Revising Dividend to Balance Capital Allocation and Accelerate Balance Sheet Improvement
Beginning with the dividend expected to be declared in the second quarter, the board plans to lower the annualized payout to $0.32 per share, representing an approximately two-thirds reduction, thereby increasing cash retention for other uses by $90 million on an annual basis. This adjustment results in a more balanced capital allocation policy that continues to provide attractive returns to shareholders, while preserving liquidity in the near-term and accelerating balance sheet improvement over time.
Resilient Balance Sheet with No Near-term Maturities and Ample Liquidity
At March 31, Covanta had total debt of approximately $2.6 billion, with no debt scheduled to mature prior to 2023. The financial covenant ratio of senior secured debt to adjusted EBITDA under the company's corporate credit facility is estimated to be 2.2x as of March 31, substantially below the covenant limit of 4.0x. At March 31, available borrowing capacity under the revolving credit facility was $425 million, which Covanta believes will provide ample liquidity for any potential stress scenario during the COVID-19 pandemic period.
Withdrawing 2020 Guidance
While the majority of Covanta's business is stable, supported by long-term contracts and operating in line with prior expectations, the current environment is very fluid, and there are numerous uncertainties relating to the timeline of the COVID-19 pandemic and its potential impact on the broader economy and Covanta's business. Given this uncertainty, Covanta is withdrawing its previously issued guidance for 2020. Covanta will provide a more detailed update on current operating conditions on its quarterly earnings results call in early May.