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Covanta Holding Corp., Morristown, New Jersey, reported its first quarter earnings on April 29.

Year over year, revenue increased from $468 million to $498 million, adjusted EBITDA increased from $97 million to $106 million, net cash provided by operating activities fell from $61 million to $52 million, and free cash flow increased from $18 million to $19 million.

Other highlights include:

  • Strong first quarter operating results, including 4 percent year-over-year waste-to-energy tip fee price growth
  • Metals prices significantly higher year-over-year on improving demand and tight market supply
  • Increasing 2021 guidance for adjusted EBITDA and free cash flow
  • Initiating overhead cost rationalization program for $30 million in annual savings by 2023
  • Establishing a long-term financial outlook with an expected adjusted EBITDA of $600 million and free cash flow of $250 million by 2024, as well as a leverage ratio below 5x by the end of 2022.

“Covanta is off to a great start operationally, and with strong waste and metals markets, improved visibility on waste-to-energy plant production for the balance of the year, and continued focus on cost control, we are confidently raising our guidance for 2021,” Covanta President and CEO Michael Ranger says. “I am also pleased to announce the first definitive steps in our strategic review process. We are instituting a comprehensive overhead cost rationalization program to right-size the level of support required for the business. In addition, we continue to explore third-party interest in discrete assets and develop plans to address underperforming operations. With our new UK projects coming online over the next three years, including Rookery in Q1 next year, and planned cost improvements, we have a high degree of visibility to meaningful growth from drivers under our control, which translates to a compelling outlook for cash generation.”

The company changed its adjusted EBITDA guidance for 2021 from its previous projection range of $435 million to $465 million to a range of $460 million to $480 million. Free cash flow guidance has been upgraded from its previous projection of $100 million to $140 million up to a range of $125 million to $155 million.

On the company’s earnings call, Ranger noted that Covanta has identified four principal components of its business during its previously reported internal strategic review process.

“Our review has identified opportunities in cost control, capital allocation, asset rationalization and medium- to long-term cash flow generation. The steps we will take will be different for each component,” he said.

Ranger explained these four principal components on the company’s earnings call:

“Our 21 North American waste-to-energy plants, we own 100 percent of these plants and benefit from long-term contracted waste supply and strong local waste markets. As a group, they represent the vast majority of the value of our business as configured today.

“Second, our Irish and UK waste-to-energy business, … we own these plants in partnership with financial and waste industry participants. Both the Irish and UK markets are much more favorable than North America in terms of waste and energy pricing and policy support. When the UK plants go into operation, we will have a new fleet of waste-to-energy plants in these markets, and as a group, they will make a meaningful contribution to both our near-term results and growing future equity value.

“Third, our environmental solutions business, which is an adjacency to our waste-to-energy business, sources high-value non-hazardous waste from commercial and industrial customers. It has more of a sales and logistics focus and is less capital intensive than our core waste-to-energy business.

“Fourth, [we operate] 18 [waste-to-energy plants owned by the public sector] in North America. While some of these operations are profitable as a group, they are contractually and financially challenged and we are developing plans to improve the value they represent through renegotiations and explorations. As we think about each of these components of our business in the context of our strategic review, we have engaged with third parties to obtain focused value discovery for each of these business lines. These are presently ongoing.”

Ranger said the company is focused on improving cash flow contribution of each financially challenged operation. If no path exists, the company will close sites and shutter operations. Ranger said the company is also working with some public sector clients to negotiate contract extensions in an effort to establish more profitable operations.

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