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Covanta 3Q17 report +4

09:52 27-Oct-17

Covanta has just concluded its conference call.  The executive summary is that we should be at a turning point from this quarter to next.  Although the FY guidance range was affirmed, it will probably come in towards the low end.  The main reason for this is that the Fairfax closure extended much longer than expected due to lagging approvals and inspections from the county.  The closure represented a mid-single-digit hit to the company, which made up for by insurance payments next year, not this year, as originally expected.

Plant closures offset operational strength in the main waste business.  The only other weakness was, of course, the power market, but energy hedging has continued, and market exposure is now down to 25% for 2018, from one third last quarter.  Management has already begun to hedge 2019 as well.  As I've projected, metals were unexpectedly strong, with revenue increasing 38% QoQ.  Management upped its guidance for ferrous to$250-260 per ton, but its the non-ferrous processing that I've highlighted in the past that's really shown.  Realized revenue per ton more than doubled YoY and should continue to improve. 

Looking forward, the second Marine transfer station for NYC should also begin running in a little over a year.  The improved ash processing that was part of my original thesis for Covanta is maybe a year off as well.  The Rookery project should begin 3 yrs of construction in 1H18, after getting the final environmental permit, which is expected around the turn of the year.  The size of the project is 80-90% of Dublin.  There was a lot of curiosity about the project's financing, and how that would dovetail with management's goal to start improving the balance sheet.  Management would only say that there are a lot of options being considered, and they believe it can be done.  The smaller Biffa projects will follow.  Perhaps most importantly, management was explicit about new projects only being undertaken if the financing can BOTH improve the balance sheet and maintain the dividend.  Financing through dilution was ruled out.  That's all I needed to hear, and apparently the that goes for the market as well, as CVA is up about 4% this morning.  I look forward to the company returning to growth in 2018.

Covanta has announced its earnings for the third quarter:

EPS of 12 cents beats by 3 cents

on revenue of $429M, which beats by $6M

As I projected, management states that Dublin has commenced commercial operation and is "performing very impressively."  Fairfax should return to service around year-end as well.  FY guidance for 2017 was affirmed in light of the continuing strong markets for waste management and metals.  CVA is up 2% so far, as the market begins to realize that SA Editors can't tell good analysis from nonsense.  The conference call is tomorrow morning.  I will, of course, report further on anything interesting.

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