Morristown, N.J.-based Covanta Holding Corporation released its third quarter 2019 results, reporting total revenue of $465 million, an increase of $9 million from the third quarter of 2018. Organic growth, excluding the impact of commodities, contributed $12 million and higher waste prices and strong energy-from-waste (EfW) plant production outweighed lower construction revenue in the quarter.
“Our third quarter results reflect solid operations and a strong waste market, which drove favorable year-over-year performance,” said Jones in a statement. "Waste processing and energy production are tracking toward record levels this year, and we continue to push waste pricing, with same-store tip fees up 4 percent in the quarter. While this has been a challenging year from a commodity price perspective, we remain focused on the areas we control, and I am very proud of our continued operational performance, as well as our progress on key strategic initiatives."
During the third quarter, Covanta continued to struggle with commodity prices, seeing a $13 million decline in revenue related to lower market prices in both energy and metals.
“As we discussed on the second quarter call, we continue to see a soft environment for many of the commodities we sell, and this has not improved over the last three months,” said Covanta's President and CEO Stephen J. Jones on a call with investors. “Scrap steel and ferrous started to decline in the second quarter, but HMS pricing appeared to be stable in the third quarter in the $220 per ton range. In October, prices took another leg down with the index reaching $192 per ton. At these price levels, we believe the markets will see a reduction in scrap flows, which should then stabilize prices.”
“Longer term, we expect to see continued domestic demand growth for ferrous scrap as new mill capacity comes online over the next two years,” added Jones. “However, while history tells us that prices should find market equilibrium again with prices above current levels, the timing of recovery is hard to predict.”
In an effort to combat commodity pricing challenges and to improve operations, the company is investing in technology.
In the metal processing side of the business, for example, Covanta recently invested in technologies to further separate the various types of nonferrous materials being recovered. According to Jones, the equipment began operations late in the third quarter, and the company is now separating higher-value heavy metals like copper and zinc from lower-value mixed nonferrous scrap.
Additionally, Covanta announced that it is developing its first Total Ash Processing System (TAPS), which is under construction at the Fairless Hills, Pa., metal processing facility. According to Jones, TAPS will reduce Covanta’s long-term cost of ash disposal and create new revenue opportunities.
“While we expected to be fully operational by the fourth quarter this year, we extended the construction timeline a bit to optimize the equipment,” said Jones. “This is the first system of its type, and it’s an exciting, long-term opportunity for Covanta so we want to make sure we get this first one right. We now anticipate starting up some components later this year before moving to commissioning of the entire system early next year.”
Covanta also is focusing on an area it views as a key opportunity: regulated medical waste. During the third quarter, the company grew regulated medical waste revenue by more than 40 percent as it continued to ramp up volumes at its three EfW plants permitted to accept this waste.
While regulated medical waste still represents a modest amount of the company’s profile waste revenue, Jones said Covanta sees very strong growth potential and is working with regulated medical waste collection companies to source more volume.
The company’s adjusted EBITDA was $125 million for Q3 2019, a $3 million increase compared to the third quarter of 2018. Excluding commodities, adjusted EBITDA improved by $12 million organically and the benefit of higher waste prices in plant production more than offset higher planned maintenance this quarter, according to Brad Helgeson, chief financial officer at Covanta.
Looking ahead to the fourth quarter and full year, the company will lack $11 million and $17 million, respectively, in business interruption and insurance proceeds received in 2018.
“We knew coming into the year that it would be challenging to meet our 3 percent to 5 percent annual organic adjusted EBITDA growth target given this year-over-year comparison, and this remains the case,” said Helgeson. “However, we expect to be in our target range excluding the impact of insurance proceeds.”
Here are some additional highlights from Q3 2019:
- During the third quarter, Covanta continued executing on its operating plan. “With solid performance in the quarter and line of sight on the remainder of the year, we’re affirming our full-year guidance of $420 million to $445 million in adjusted EBIDTA and $120 million to $145 million in free cash flow,” said Jones during a call with investors.
- The company experienced a more than 20 percent decline in the commodities it sells, but according to Jones, Covanta was able to overcome the headwind by driving organic adjusted EBIDTA growth of 9 percent in the third quarter.
- “During the quarter, we processed 5.5 million tons of waste, an 8 percent increase over last year,” said Jones. “This production includes 2.5 percent same-store tip fee volume growth, and some of our largest tip fee plants continue to run at or near record levels.”
- The company continues to advance its U.K. development projects. Jones said Protos and Newhurst are well under construction and that Covanta is actively working with its partners to move the projects forward. Protos remains positioned to reach financial close in 2019, and Newhurst is expected to reach financial close in early 2020.
- Transactions added $10 million to revenue in the quarter with the September 2018 acquisition of the Palm Beach waste-to-energy operations and the 2019 Q1 startup of the Manhattan Marine Transfer Station. Long-term contract transitions added $1 million for the quarter.