Attached files
| file | filename |
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| 8-K - 8-K - COVANTA HOLDING CORP | form8-kq316earnings.htm |
| EX-99.1 - EXHIBIT 99.1 - COVANTA HOLDING CORP | exhibit991q316.htm |
NYSE: CVA October 25, 2016
Third Quarter 2016
Earnings Conference Call
Exhibit 99.2
October 25, 2016 2
Cautionary Statements
All information included in this earnings presentation is based on continuing operations, unless otherwise noted.
Forward-Looking Statements
Certain statements in this press release constitute “forward-looking” statements as defined in Section 27A of the Securities Act of 1933 (the “Securities Act”), Section 21E of
the Securities Exchange Act of 1934 (the “Exchange Act”), the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) or in releases made by the Securities and
Exchange Commission (“SEC”), all as may be amended from time to time. Such forward-looking statements involve known and unknown risks, uncertainties and other
important factors that could cause the actual results, performance or achievements of Covanta Holding Corporation and its subsidiaries (“Covanta”) or industry results, to
differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Statements that are not historical fact are
forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as the words “plan,” “believe,”
“expect,” “anticipate,” “intend,” “estimate,” “project,” “may,” “will,” “would,” “could,” “should,” “seeks,” or “scheduled to,” or other similar words, or the negative of these terms or
other variations of these terms or comparable language, or by discussion of strategy or intentions. These cautionary statements are being made pursuant to the Securities
Act, the Exchange Act and the PSLRA with the intention of obtaining the benefits of the “safe harbor” provisions of such laws. Covanta cautions investors that any forward-
looking statements made by us are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to
differ materially from those forward-looking statements with respect to Covanta, include, but are not limited to, the risk that Covanta may not successfully grow its business
as expected or close its announced or planned acquisitions or projects in development, and those factors, risks and uncertainties that are described in periodic securities
filings by Covanta with the SEC. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are
reasonable, actual results could differ materially from a projection or assumption in any of our forward-looking statements. Our future financial condition and results of
operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The forward-looking statements contained in this press
release are made only as of the date hereof and we do not have, or undertake, any obligation to update or revise any forward-looking statements whether as a result of new
information, subsequent events or otherwise, unless otherwise required by law.
Note: All estimates with respect to 2016 and future periods are as of October 25, 2016. Covanta does not have or undertake any obligation to update or revise any forward-
looking statements whether as a result of new information, subsequent events or otherwise, unless otherwise required by law.
Non-GAAP Financial Measures
We use a number of different financial measures, both United States generally accepted accounting principles (“GAAP”) and non-GAAP, in assessing the overall
performance of our business. The non-GAAP financial measures of Adjusted EBITDA, Free Cash Flow and Adjusted EPS, as described and used in this earnings
presentation, are not intended as a substitute or as an alternative to net income, cash flow provided by operating activities or diluted earnings per share as indicators of our
performance or liquidity or any other measures of performance or liquidity derived in accordance with GAAP. In addition, our non-GAAP financial measures may be different
from non-GAAP measures used by other companies, limiting their usefulness for comparison purposes. The presentations of Adjusted EBITDA, Free Cash Flow and
Adjusted EPS are intended to enhance the usefulness of our financial information by providing measures which management internally use to assess and evaluate the
overall performance of its business and those of possible acquisition candidates, and highlight trends in the overall business. Please refer to the appendix of this
presentation for reconciliations of non-GAAP financial measures.
October 25, 2016 3
Q3 2016 Summary
(in millions, except per share amounts) Q3 2015 Q3 2016
FY 2016
Guidance (1)
Revenue $422 $421 N/A
Adjusted EBITDA $139 $124 $390 - $430
Cash flow provided by operating activities $123 $88 N/A
Free Cash Flow $107 $74 $140 - $180
Diluted Earnings Per Share $0.25 $0.42 N/A
Adjusted EPS $0.22 $0.18 N/A
(Unaudited)
• Completed sale of China equity interests for net proceeds of $103 million in cash
▪ $52 million repatriated and used to repay revolver borrowings
▪ Remaining funds available for potential future overseas investment
• Construction of Dublin EfW facility over 75% complete; signed waste contracts for 90% of facility capacity
• Reaffirming 2016 full-year guidance
1) Reaffirmed guidance as of October 25, 2016.
October 25, 2016 4
Waste Update
North America EfW (1)
(in millions, except price) Q3 2015A Q3 2016A 2016E
Waste & Service Revenue:
Waste Processing $230 $241 $935 - $965
Debt Service 4 2 9
Other (2) 2 3 5 - 10
Total $236 $246 $950 - $980
Tons: (3)
Contracted (4) 4.4 4.6
Uncontracted 0.5 0.5
Total 4.9 5.1 19.5 - 19.7
Revenue per Ton: (5)
Contracted $44.57 $44.21
Uncontracted $69.21 $76.76
Average $47.01 $47.45 $48.00 - $49.00
• Client and new business activity:
▪ Extended waste contracts with clients at Indianapolis
(to 2025) and Huntsville (to 2020)
• Q3 2016 EfW waste processing revenue vs. Q3 2015:
▪ Same store price up $6 million (2.5%);
volume up $2 million (0.9%)
▪ EfW profiled waste up 13% year-over-year
• Trends and outlook:
▪ Uncontracted price improvement driven by strong
Northeast price environment and continued mix shift
away from low-priced spot MSW
▪ Contractual price escalations running at ~1%
1) North America EfW results include only Energy-from-Waste assets.
2) Other includes service revenue not directly related to waste processing.
3) Excludes liquid waste.
(Unaudited)
4) Includes contracts at transfer stations from which waste is internalized.
5) Calculated for waste and service revenue, excluding debt service and other revenue.
October 25, 2016 5
Energy Update
North America EfW
(in millions, except price) Q3 2015A Q3 2016A 2016E
Energy Revenue:
Energy Sales $76 $81 $305 - $315
Capacity 10 11 ~40
Total $86 $92 $345 - $360
MWh Sold:
Contracted 0.8 0.8 3.0 - 3.1
Hedged 0.3 0.5 ~1.9
Market 0.4 0.2 ~1.1
Total 1.5 1.5 6.0 - 6.2
Revenue per MWh: (1)
Contracted $63.69 $65.82 ~$65
Hedged $44.05 $37.98 ~$42
Market $30.86 $37.32 ~$30
Average $50.78 $52.63 ~$52
• Q3 2016 EfW energy revenue drivers vs. Q3 2015:
▪ Same store revenue up 0.6%
◦ Price up $4 million
◦ Volume down $4 million as a result of downtime at
a few merchant facilities
• Trends and outlook:
▪ Average contracted price benefited by strong prices
under LIPA collar contract
▪ Hot summer weather extending into September
supported market prices
▪ End of season gas storage and winter weather
forecasts will drive forward markets
▪ Remaining uncontracted exposure in 2016
approximately 500k MWh
▪ Hedging activity:
◦ Market exposure in 2017 and 2018 hedged down
to 1.7 and 4.1 million MWh, respectively
◦ Average hedge price for 2017 is approximately
$35 per MWh
1) Excludes capacity revenue.
(Unaudited)
October 25, 2016 6
Recycled Metals Update
North America
($ in millions, except price;
tons in thousands) Q3 2015A Q3 2016A 2016E
Metals Revenue:
Ferrous $10 $8 $30 - $37
Non-Ferrous 6 6 20 - 25
Total $16 $14 $50 - $60
Tons Sold:
Ferrous 90 72 330 - 340
Non-Ferrous 9 10 34 - 38
Revenue per Ton:
Ferrous $113 $117 $100 - $110
Non-Ferrous $716 $581 $600 - $650
Average HMS index price (1) $219 $212 $180 - $200
• Q3 2016 revenue drivers vs. Q3 2015:
▪ Volume:
◦ Ferrous down 21% – sales volume impacted by
centralized processing and timing of shipments
◦ Non-ferrous up 13%
▪ Price:
◦ Ferrous up 3.1%, with lower market price more
than offset by higher realized revenue as % of
index
◦ Non-ferrous down 19%
• Market trends and outlook:
▪ Market pricing held steady in Q3, but starting to show
seasonal shift downward as expected
1) Q3 2016 and Q3 2015 average #1 Heavy Melt Steel composite index ($ / gross ton) as published by American Metal Market.
(Unaudited)
October 25, 2016 7
Plant Operating Expense and Maintenance Capex Update
• Q3 2016 summary:
▪ North America EfW plant maintenance expense up
8.5% vs. Q3 2015 on same store basis, driven
primarily by scheduled capital projects at certain
public facilities (expensed)
▪ North America EfW other plant operating expenses:
◦ Same store up 2.7% ($4 million) vs. Q3 2015
primarily due to wage and benefit inflation
◦ Total North America EfW other plant operating
expense up additional $3 million, primarily
due to the Durham-York facility coming online
• Trends and outlook:
▪ 2016 full-year maintenance spend now anticipated
around the high end of our initial range, primarily as
a result of increased maintenance activity and
capital improvements at Fairfax facility
Total Company
(in millions) Q3 2015A Q3 2016A 2016E
Plant Maintenance Expense:
North America EfW $43 $46 $265 - $275
Other 3 2
Total $46 $48
Maintenance Capex:
North America EfW $7 $12 $85 - $95
Other 9 2 ~20
Total $16 $14 $105 - $115
Total EfW Maintenance Spend $50 $58 $350 - $370
Other Plant Operating Expense:
North America EfW $151 $159
Other 63 65
Total $214 $224
(Unaudited)
October 25, 2016 8
Financial Overview
October 25, 2016 9
Revenue: Q3 2016 vs. Q3 2015
Price 6
Vol 2
Price 4
Vol (4)
Capacity 1
Price (4)
Vol 1
Waste 7
DS (1)
PPA (2)
DY 3
Pinellas 7
DY (6)
Sus. sol.
(3)
October 25, 2016 10
Adjusted EBITDA: Q3 2016 vs. Q3 2015
Waste 4
PPA (1)
MPF 1
Waste Pricing 6
DY 2
Other OH (5)
Biomass (3)
October 25, 2016 11
Free Cash Flow: Q3 2016 vs. Q3 2015
Restricted Funds 4
October 25, 2016 12
Growth Investment Outlook
Growth Investments (Unaudited, in millions)
FY 2015
Actual
YTD
9/30/16
FY 2016
Outlook
Organic growth investments (1) $34 $38 ~ $50
New York City contract 30 3 ~5
Essex County EfW emissions control system (2) 26 27 ~35
Acquisitions 72 9 9
Subtotal: Corporate funded $162 $77 ~ $100
Dublin facility construction 184 132 175 - 200
Total growth investments $346 $209 ~ $275 - 300
1) Organic growth programs are focused primarily on growing waste and metal revenue.
2) Classified as growth investment because cost is reflected in overall economic benefit of contract restructuring completed in 2013.
• Remaining Dublin investment to be funded entirely with project financing – no impact on domestic capital allocation
• Acquisitions to be targeted on an opportunistic basis – potential additional activity not reflected in FY 2016 outlook
October 25, 2016 13
Capitalization Summary
1) Net debt is calculated as total principal amount of debt outstanding less cash and cash equivalents, debt service principal-related restricted funds ($16 million at
September 30, 2016), and escrowed construction financing proceeds ($42 million at September 30, 2016).
2) Excludes $191 million of net debt (debt of $203 million less restricted funds of $12 million) outstanding at September 30, 2016 at Dublin project subsidiary.
3) Leverage ratio as calculated for senior credit facility covenant. Effectively represents leverage at Covanta Energy, LLC and subsidiaries.
(Face value; unaudited, in millions) 12/31/2014 12/31/2015 9/30/2016
Cash and Cash Equivalents $84 $94 $113
Corporate Debt:
Secured $405 $621 $651
Unsecured 1,569 1,664 1,664
Total Corporate Debt $1,974 $2,285 $2,315
Project Debt 225 197 428
Total Debt $2,199 $2,482 $2,743
Net Debt (1) $2,029 $2,326 $2,572
Stockholders’ Equity $784 $640 $500
Credit Ratios:
Net Debt / Adjusted EBITDA Ratio 4.3x 5.4x 6.3x
Excluding Non-Recourse Construction Debt (2) 4.3x 5.3x 5.8x
Senior Credit Facility Leverage Ratio (3) 2.1x 2.9x 3.2x
October 25, 2016 14
Appendix
October 25, 2016 15
Long-term Outlook: Energy Detail
North America EfW Facilities
(Unaudited, in millions, except price) 2014A 2015A 2016E 2017E 2018E 2019E 2020E
MWh Sold – CVA Share:
Contracted 3.2 3.0 3.1 2.4 2.1 2.1 2.1
Hedged 1.4 1.4 1.9 2.4 0.3 — —
Market 1.1 1.4 1.1 1.7 4.1 4.5 4.5
Total MWh Sold 5.6 5.8 ~6.1 ~6.5 ~6.5 ~6.6 ~6.6
Market Sales (MWh) by Geography:
PJM East 0.4 0.5 0.5 0.8 2.4 2.7 2.7
NEPOOL 0.3 0.3 0.1 0.4 1.0 1.1 1.1
NYISO — 0.1 0.1 0.1 0.2 0.2 0.2
Other 0.3 0.4 0.4 0.4 0.5 0.5 0.5
Total Market Sales 1.1 1.4 1.1 1.7 4.1 4.5 4.5
Revenue per MWh: (1)
Contracted $67.56 $65.56 ~$65
Average ~$57 / MWh on contracts expiring through
2020
Hedged $42.87 $45.64 ~$42
Market $49.12 $33.18 ~$30
Average Revenue per MWh $58.06 $53.17 ~$52
Note: hedged generation as presented above reflects only existing hedges.
1) Excludes capacity revenue.
• Note: Production estimates for 2017 - 2020 are approximated based on historical operating performance and expected
contract structures
October 25, 2016 16
Long-term Outlook: Debt Service Revenue
Project Debt Repayment (Unaudited, in millions): 2008–2015 2016 2017 2018 2019 2020
Beyond
2020
Total Principal Payments (2) $909 $16 $17 $18 $13 $2 $75
Total Change in Principal-Related Restricted Funds (193) — — (5) (9) — (1)
Net Cash Used for Project Debt Principal Repayment $716 $16 $17 $13 $4 $2 $74
Client Payments for Debt Service:
(Unaudited, in millions) 2008–2015 2016 2017 2018 2019 2020
Beyond
2020
Debt Service Revenue – Principal $352 $6 $6 $5 $3 $3 $39
Debt Service Revenue – Interest 98 4 3 3 2 2 16
Debt Service Billings in Excess of Revenue Recognized 106 4 5 (1) (1) (1) 4
Client Payments for Debt Service (1) $556 $14 $14 $7 $4 $4 $60
Net Change in Debt Service Billings per Period $(108) $(1) $— $(7) $(3) $— $—
1) Related to Service Fee facilities only.
2) Excludes payments associated with Union capital lease.
Note: North American operations only. Excludes payments related to project debt refinancing.
October 25, 2016 17
Non-GAAP Reconciliation: Adjusted EBITDA &
Free Cash Flow
Q3 YTD Full Year
(Unaudited, in millions) 2016 2015 2016 2015 Estimated 2016 (1)
Net Income (Loss) Attributable to Covanta Holding Corporation $54 $34 $(12) $(9)
Depreciation and amortization expense 52 50 155 148
Interest expense, net 35 34 103 102
Income tax expense (benefit) 12 11 5 (19)
Impairment charges — — 19 24
Gain on sale of business (43) — (43) —
Loss on extinguishment of debt — — — 2
Debt service billings in excess of revenue recognized 1 — 3 1
Severance and reorganization costs 1 1 3 3
Non-cash compensation expense 4 4 13 15
Capital type expenditures at service fee operated facilities (2) 6 3 29 25
Other 2 2 7 9
Total adjustments 70 105 294 310
Adjusted EBITDA $124 $139 $282 $301 $390 - $430
Cash paid for interest, net of capitalized interest (24) (22) (91) (83)
Cash paid for taxes (3) (2) (7) (6)
Capital type expenditures at service fee operated facilities (2) (6) (3) (29) (25)
Adjustment for working capital and other (3) 11 (9) (33)
Cash flow provided by operating activities from continuing operations $88 $123 $146 $154 $245 - $295
Maintenance capital expenditures (14) (16) (82) (71) (105) - (115)
Free Cash Flow $74 $107 $64 $83 $140 - $180
Weighted Average Diluted Shares Outstanding 131 134 129 132
1) Guidance reaffirmed as of October 25, 2016.
2) Adjustment for impact of adoption of FASB ASC 853 – Service Concession Arrangements.
October 25, 2016 18
Non-GAAP Reconciliation: Adjusted EBITDA
Full Year LTM
(Unaudited, in millions) 2014 2015 9/30/2016
Net (Loss) Income Attributable to Covanta Holding Corporation $(2) $68 $65
Operating loss related to insurance subsidiaries 2 — —
Depreciation and amortization expense 211 198 205
Debt service expense 147 134 135
Income tax expense (benefit) 15 (84) (60)
Impairment charges 64 43 38
Gain on sale of business — — (43)
Loss on extinguishment of debt 2 2 —
Net income attributable to noncontrolling interests in subsidiaries 1 1 1
Debt service billings in excess of revenue recognized 2 1 3
Severance and reorganization costs 9 4 4
Non-cash compensation expense 17 18 16
Capital type expenditures at service fee operated facilities (1) — 31 35
Other 6 12 10
Total adjustments 476 360 344
Adjusted EBITDA $474 $428 $409
1) Adjustment for impact of adoption of FASB ASC 853 – Service Concession Arrangements.
Note: Adjusted EBITDA results provided to reconcile the denominator of the Net Debt / Adjusted EBITDA ratios on slide 13.
October 25, 2016 19
Non-GAAP Reconciliation: Adjusted EPS
Q3 YTD
(Unaudited, in millions, except per share amounts) 2016 2015 2016 2015
Diluted Earnings (Loss) Per Share $0.42 $0.25 $(0.09) $(0.07)
Reconciling Items (0.24) (0.03) (0.14) 0.11
Adjusted EPS $0.18 $0.22 $(0.23) $0.04
Reconciling Items
Impairment charges $— $— $19 $24
Severance and reorganization costs — 1 2 7
Gain on sale of business (43) — (43) —
Loss on extinguishment of debt — — — 2
Effect on income of derivative instruments not designated as hedging instruments 1 (3) 2 (3)
Effect of foreign exchange loss (gain) on indebtedness — 1 (1) 2
Total Reconciling Items, pre-tax (42) (1) (21) 32
Pro forma income tax impact 10 (4) 2 (18)
Grantor trust activity 1 1 1 1
Total Reconciling Items, net of tax $(31) $(4) $(18) $15
Diluted Earnings Per Share Impact $(0.24) $(0.03) $(0.14) $0.11
October 25, 2016 20
Non-GAAP Financial Measures
Free Cash Flow
Free Cash Flow is defined as cash flow provided by operating activities, less maintenance capital expenditures, which are capital expenditures primarily to maintain our existing facilities. We use the non-
GAAP measure of Free Cash Flow as a criterion of liquidity and performance-based components of employee compensation. We use Free Cash Flow as a measure of liquidity to determine amounts we can
reinvest in our core businesses, such as amounts available to make acquisitions, invest in construction of new projects, make principal payments on debt, or amounts we can return to our stockholders
through dividends and/or stock repurchases. In order to provide a meaningful basis for comparison, we are providing information with respect to our Free Cash Flow for the three and nine months ended
September 30, 2016 and 2015, reconciled for each such period to cash flow provided by operating activities, which we believe to be the most directly comparable measure under GAAP.
Adjusted EBITDA
We use Adjusted EBITDA to provide further information that is useful to an understanding of the financial covenants contained in the credit facilities as of September 30, 2016 of our most significant subsidiary,
Covanta Energy, LLC ("Covanta Energy"), through which we conduct our core waste and energy services business, and as additional ways of viewing aspects of its operations that, when viewed with the GAAP
results and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete understanding of our core business. The calculation of Adjusted EBITDA is based on the
definition in Covanta Energy’s credit facilities as of September 30, 2016, which we have guaranteed. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, as adjusted
for additional items subtracted from or added to net income. Because our business is substantially comprised of that of Covanta Energy, our financial performance is substantially similar to that of Covanta Energy.
For this reason, and in order to avoid use of multiple financial measures which are not all from the same entity, the calculation of Adjusted EBITDA and other financial measures presented herein are ours,
measured on a consolidated basis. Under the credit facilities as of September 30, 2016, Covanta Energy is required to satisfy certain financial covenants, including certain ratios of which Adjusted EBITDA is an
important component. Compliance with such financial covenants is expected to be the principal limiting factor which will affect our ability to engage in a broad range of activities in furtherance of our business,
including making certain investments, acquiring businesses and incurring additional debt. Covanta Energy was in compliance with these covenants as of September 30, 2016. Failure to comply with such financial
covenants could result in a default under these credit facilities, which default would have a material adverse affect on our financial condition and liquidity.
These financial covenants are measured on a trailing four quarter period basis and the material covenants are as follows:
• maximum Covanta Energy leverage ratio of 4.00 to 1.00, which measures Covanta Energy’s Consolidated Adjusted Debt (which is the principal amount of its consolidated debt less certain restricted
funds dedicated to repayment of project debt principal and construction costs) to its Adjusted EBITDA (which for purposes of calculating the leverage ratio and interest coverage ratio, is adjusted on
a pro forma basis for acquisitions and dispositions made during the relevant period); and
• minimum Covanta Energy interest coverage ratio of 3.00 to 1.00, which measures Covanta Energy’s Adjusted EBITDA to its consolidated interest expense plus certain interest expense of ours, to
the extent paid by Covanta Energy.
In order to provide a meaningful basis for comparison, we are providing information with respect to our Adjusted EBITDA for the three and nine months ended September 30, 2016 and 2015, reconciled for
each such period to net income and cash flow provided by operating activities, which are believed to be the most directly comparable measures under GAAP. Our projected full year 2016 Adjusted EBITDA is
not based on GAAP net income/loss and is anticipated to be adjusted to exclude the effects of events or circumstances in 2016 that are not representative or indicative of our results of operations. Projected
GAAP net income/loss for the full year would require inclusion of the projected impact of future excluded items, including items that are not currently determinable, but may be significant, such as asset
impairments and one-time items, charges, gains or losses from divestitures, or other items. Due to the uncertainty of the likelihood, amount and timing of any such items, we do not have information available
to provide a quantitative reconciliation of full year 2016 projected net income/loss to an Adjusted EBITDA projection.
Adjusted EPS
Adjusted EPS excludes certain income and expense items that are not representative of our ongoing business and operations, which are included in the calculation of Diluted Earnings Per Share in accordance
with GAAP. The following items are not all-inclusive, but are examples of reconciling items in prior comparative and future periods. They would include impairment charges, the effect of derivative instruments not
designated as hedging instruments, significant gains or losses from the disposition or restructuring of businesses, gains and losses on assets held for sale, transaction-related costs, income and loss on the
extinguishment of debt and other significant items that would not be representative of our ongoing business. We will use the non-GAAP measure of Adjusted EPS to enhance the usefulness of our financial
information by providing a measure which management internally uses to assess and evaluate the overall performance and highlight trends in the ongoing business. In order to provide a meaningful basis for
comparison, we are providing information with respect to our Adjusted EPS for the three and nine months ended September 30, 2016 and 2015, reconciled for each such period to diluted income per share, which
is believed to be the most directly comparable measure under GAAP.