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Covanta 1Q20 results ?3

09:40 08-May-20

The Covanta conference call has just concluded and some very good detail was communicated:

• Energy: is over 50% hedged for 2021 at similar prices to this year, but going forward it appears that Covanta intends to sell more of it at market prices for the next few years.  Power prices are down 40% at the moment, but I expect that electricity demand should rebound much better than fuel.
• Waste: tip fees are up 5%, Profiled Waste grew 18%, but it and other non-residential waste, which constitutes about 30% of the business, is down leading Covanta to accept lower priced waste in some cases.  As a result revenue is down 15-20% at the moment but costs are also down, resulting in less than 15% overall impact.  There is also no lock-in on the lower priced waste and volume is already starting to improve as lock downs ease.  Sentiment in the U.S. also seems to be improving, and there are negotiations to expand operations in Pasco County, FL.
• Development: Earlsgate construction is restarting and Covanta remains focused on the U.K. market for the short term.  TAPS is proceeding through testing & commissioning, and commercial operation should ramp this year.  That will replace $15M/year in costs with revenue over the next two years.
• Metals: Ferrous prices continue to plummet.  Iron scrap was down 20% to $236/ton for 1Q20, $224 in April, May looks closer to $200.  Aluminum is down 15% to $0.41/lb.  I expect this to rebound more slowly than energy
  

When you put it all together we're looking at about a $40M EBITDA hit if commodities do not improve.  Offsetting that is $15-30M in operational savings targeted for this year.  That, together with the almost $100M saved by the dividend cut, will allow Covanta to reduce debt more quickly.  In the new normal, I don't think investors should expect a dividend rebound in the near term, but the possibility of new deals is increased.  That could get CVA back into double digits, but in the current environment, I expect CVA to trade around the $7.50 mark and only stretch up through single digits as commodities improve.

Covanta has published its first quarter results:

• a loss of 24 cents per share misses by 2 cents
• from revenue of $468M, which beats by $10M

There is no further color since guidance was pulled 3 weeks ago.  Energy is 81% hedged for this year, comparable to 2019, but it's next year that people will be worrying about.  CVA is untraded but bid slightly higher after hours.  The conference call is at 8:30 tomorrow.  More after that.

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