Covanta Holding Corporation Reports 2017 Fourth Quarter And Full Year Results And Provides 2018 Guidance

Year Ended December 31,

2016

2017

(Unaudited, $ in millions, except
per share amounts)

Revenue

$1,699

$1,752

Net (loss) income

$(4)

$57

Adjusted EBITDA

$410

$408

Net cash provided by operating activities

$286

$243

Free Cash Flow Before Working Capital

$135

$88

Free Cash Flow

$176

$132

Diluted EPS

$(0.03)

$0.44

Adjusted EPS

$(0.06)

$(0.37)

2017
Actual

2018
Guidance Range ⁽¹⁾

Adjusted EBITDA

$408

$425 - $455

Free Cash Flow Before Working Capital

$88

$100 - $130

Free Cash Flow

$132

$70 - $100

Covanta Holding Corporation

Exhibit 1

Consolidated Statements of Operations

Three Months Ended
December 31,

Twelve Months Ended
December 31, 2017

2017

2016

2017

2016

(Unaudited)
(In millions, except per share amounts)

OPERATING REVENUE:

Waste and service revenue

$

329

$

312

$

1,231

$

1,187

Energy revenue

93

91

334

370

Recycled metals revenue

28

17

82

61

Other operating revenue

45

37

105

81

Total operating revenue

495

457

1,752

1,699

OPERATING EXPENSE:

Plant operating expense

319

276

1,271

1,177

Other operating expense, net

27

41

51

86

General and administrative expense

30

29

112

100

Depreciation and amortization expense

60

52

215

207

Impairment charges ^(a)

1

1

2

20

Total operating expense

437

399

1,651

1,590

Operating income

58

58

101

109

OTHER INCOME (EXPENSE):

Interest expense, net

(41)

(35)

(147)

(138)

Gain (loss) on asset sales ^(a)

—

1

(6)

44

Loss on extinguishment of debt ^(a)

(71)

—

(84)

—

Other (expense) income, net

(1)

—

1

(1)

Total other expense

(113)

(34)

(236)

(95)

(Loss) income before income tax benefit (expense) and equity in net
  income from unconsolidated investments

(55)

24

(135)

14

Income tax benefit (expense) ^(b)

186

(17)

191

(22)

Equity in net income from unconsolidated investments

—

1

1

4

Net income (loss) ^(b)

$

131

$

8

$

57

$

(4)

Weighted Average Common Shares Outstanding:

Basic

130

129

130

129

Diluted

131

131

131

129

Earnings (Loss) Per Share: ^(b)

Basic

$

1.02

$

0.06

$

0.44

$

(0.03)

Diluted

$

1.01

$

0.06

$

0.44

$

(0.03)

Cash Dividend Declared Per Share

$

0.25

$

0.25

$

1.00

$

1.00

(a) For additional information, see Exhibit 4 of this Press Release.

(b) The three and twelve months ended December 31, 2017 include a provisional net tax benefit of $183 million ($1.39 and $1.40 per diluted share, respectively) associated with the enactment of the Tax Cuts and Jobs Act of 2017.  The enactment of this legislation resulted in an estimated income tax benefit and net income increase of $204 million, primarily due to a one-time revaluation of our net deferred tax liability based on a U.S. federal tax rate of 21%, partially offset by the estimated impact of a one-time transition tax on our unremitted foreign earnings totaling $21 million, which we will elect to offset with historical net operating losses.  These amounts are provisional and subject to change.

Covanta Holding Corporation

Exhibit 2

Consolidated Balance Sheets

As of December 31,

2017

2016

(Unaudited)

ASSETS

(In millions, except per share amounts)

Current:

Cash and cash equivalents

$

46

$

84

Restricted funds held in trust

43

56

Receivables (less allowances of $14 million and $9 million, respectively)

341

332

Prepaid expenses and other current assets

73

72

Assets held for sale ^(a)

653

—

Total Current Assets

1,156

544

Property, plant and equipment, net

2,606

3,024

Restricted funds held in trust

28

54

Waste, service and energy contract intangibles, net

251

263

Other intangible assets, net

36

34

Goodwill

313

302

Other assets

51

63

Total Assets

$

4,441

$

4,284

LIABILITIES AND EQUITY

Current:

Current portion of long-term debt

$

10

$

9

Current portion of project debt

23

22

Accounts payable

151

98

Accrued expenses and other current liabilities

313

289

Liabilities held for sale ^(a)

540

—

Total Current Liabilities

1,037

418

Long-term debt

2,339

2,243

Project debt

151

361

Deferred income taxes ^(b)

412

617

Other liabilities

75

176

Total Liabilities

4,014

3,815

Equity:

Preferred stock ($0.10 par value; authorized 10 shares; none issued and
  outstanding)

—

—

Common stock ($0.10 par value; authorized 250 shares; issued 136 shares,
  outstanding 131 and 130, respectively)

14

14

Additional paid-in capital

822

807

Accumulated other comprehensive loss

(55)

(62)

Accumulated deficit

(353)

(289)

Treasury stock, at par

(1)

(1)

Total Equity

427

469

Total Liabilities and Equity

$

4,441

$

4,284

(a)  During the fourth quarter of 2017, our EfW facility in Dublin, Ireland met the criteria to be classified as held for sale.

(b)  For additional information, see Exhibit 1 - Note (b) of this Press Release.

Covanta Holding Corporation

Exhibit 3

Consolidated Statements of Cash Flow

Twelve Months Ended
December 31,

2017

2016

(Unaudited, in millions)

OPERATING ACTIVITIES:

Net income (loss)

$

57

$

(4)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization expense

215

207

Amortization of deferred debt financing costs

7

6

Loss (gain) on asset sales ^(a)

6

(44)

Impairment charges ^(a)

2

20

Loss on extinguishment of debt ^(a)

84

—

Stock-based compensation expense

18

16

Provision for doubtful accounts

9

2

Equity in net income from unconsolidated investments

(1)

(4)

Deferred income taxes ^(b)

(193)

21

Dividends from unconsolidated investments

2

2

Other, net

(13)

(1)

Change in restricted funds held in trust

1

22

Change in working capital, net of effects of acquisitions

44

41

Changes in noncurrent assets and liabilities, net

5

2

Net cash provided by operating activities

243

286

INVESTING ACTIVITIES:

Purchase of property, plant and equipment

(277)

(359)

Acquisition of businesses, net of cash acquired

(16)

(9)

Proceeds from asset sales

4

109

Property insurance proceeds

8

3

Other, net

(8)

2

Net cash used in investing activities

(289)

(254)

FINANCING ACTIVITIES:

Proceeds from borrowings on long-term debt

400

—

Proceeds from borrowings on revolving credit facility

952

744

Proceeds from borrowing on Dublin project financing

643

159

Payment related to Dublin interest rate swap

(17)

—

Payments on the Dublin Convertible Preferred

(132)

—

Payments of borrowings on revolving credit facility

(850)

(749)

Payments on long-term debt

(415)

(4)

Payments on equipment financing capital leases

(5)

(4)

Principal payments on project debt

(382)

(51)

Payment of deferred financing costs

(21)

(6)

Payment of Dublin financing costs

(19)

—

Cash dividends paid to stockholders

(131)

(131)

Change in restricted funds held in trust

(37)

28

Common stock repurchased

—

(20)

Financing of insurance premiums, net

20

—

Other, net

(3)

(10)

Net cash provided by (used in) financing activities

3

(44)

Effect of exchange rate changes on cash and cash equivalents

5

—

Net decrease in cash and cash equivalents

(38)

(12)

Cash and cash equivalents at beginning of period

84

96

Cash and cash equivalents at end of period

$

46

$

84

(a)  For additional information, see Exhibit 4 of this Press Release.

(b)  For additional information, see Exhibit 1 - Note (b) of this Press Release.

Covanta Holding Corporation

Exhibit 4

Consolidated Reconciliation of Net Income (Loss) and Net Cash Provided by Operating Activities to Adjusted EBITDA

Three Months Ended
December 31,

Twelve Months Ended
December 31,

2017

2016

2017

2016

(Unaudited, in millions)

Net Income (Loss) ^(a)

$

131

$

8

$

57

$

(4)

Depreciation and amortization expense

60

52

215

207

Interest expense, net

41

35

147

138

Income tax (benefit) expense ^(a)

(186)

17

(191)

22

Impairment charges ^(b)

1

1

2

20

(Gain) loss on asset sales ^(c)

—

(1)

6

(44)

Loss on extinguishment of debt ^(d)

71

—

84

—

Property insurance recoveries, net ^(e)

—

—

(2)

—

Capital type expenditures at client owned facilities ^(f)

19

10

55

39

Debt service billings in excess of revenue recognized

1

1

5

4

Business development and transaction costs

4

—

5

2

Severance and reorganization costs

—

—

1

3

Stock-based compensation expense

2

3

18

16

Other ^(g)

3

2

6

7

Adjusted EBITDA

$

147

$

128

$

408

$

410

Capital type expenditures at client owned facilities ^(f)

(19)

(10)

(55)

(39)

Cash paid for interest, net of capitalized interest

(32)

(44)

(132)

(135)

Cash paid for taxes, net

—

1

—

(6)

Equity in net income from unconsolidated investments

—

(1)

(1)

(4)

Dividends from unconsolidated investments

1

—

2

2

Adjustment for working capital and other

32

62

21

58

Net cash provided by operating activities

$

129

$

136

$

243

$

286

(a)   

For additional information, see Exhibit 1 - Note (b) of this Press Release.

(b)  

During the year ended December 31, 2016, we recorded a non-cash impairment totaling $20 million which primarily consisted of $13 million related to the previously planned closure of our Pittsfield EfW facility in March 2017, which we now continue to operate, and $3 million related to an investment in a joint venture to recover and recycle metals.

(c)  

During the year ended December 31, 2017, we recorded a $6 million charge for indemnification claims related to the sale of our interests in China, which was completed in 2016.  During the year ended ended December 31, 2016, we recorded a $41 million gain on the sale of our interests in China.

(d)  

During the year ended December 31, 2017, we recorded a $71 million loss related to our Dublin debt refinancing and a $13 million loss related to the redemption of our 7.25% Senior Notes.

(e)   

During the year ended December 31, 2017, we recorded a $2 million property insurance gain related to our property insurance recoveries.

(f)  

Adjustment for impact of adoption of  FASB ASC 853 - Service Concession Arrangements.  These types of capital equipment related expenditures at our service fee operated facilities were historically capitalized prior to adoption of this new accounting standard effective January 1, 2015 and are capitalized at facilities that we own.

(g)  

Includes certain other items that are added back under the definition of Adjusted EBITDA in Covanta Energy, LLC's credit agreement.

Covanta Holding Corporation

Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow and Free Cash Flow Before Working Capital

Three Months Ended
December 31,

Twelve Months Ended
December 31,

Full  Year
Estimated 2018

2017

2016

2017

2016

(Unaudited, in millions)

Net cash provided by operating activities

$

129

$

136

$

243

$

286

$195 - $225

Add: Changes in restricted funds - operating ^(a)

—

—

—

—

10

Less: Maintenance capital expenditures ^(b)

(27)

(28)

(111)

(110)

(140 - 130)

Free Cash Flow

$

102

$

108

$

132

$

176

$70 - $100

Less: Changes in working capital

(74)

(52)

(44)

(41)

20 - 40

Free Cash Flow Before Working Capital

$

28

$

56

$

88

$

135

(a)   Adjustment for the impact of the pending adoption of ASU 2016-18 effective January 1, 2018.  Upon adoption, the statement of cash flows will explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.  Therefore, beginning in 2018, changes in restricted funds will be eliminated in arriving at net cash, cash equivalents and restricted funds provided by operating activities.

(b)  Purchases of property, plant and equipment are also referred to as capital expenditures. Capital expenditures that primarily maintain existing facilities are classified as maintenance capital expenditures. Maintenance capital expenditures in 2017 include amounts incurred but not paid as of December 31, 2017. The following table provides the components of total purchases of property, plant and equipment:

Three Months Ended
December 31,

Twelve Months Ended
December 31,

2017

2016

2017

2016

Maintenance capital expenditures

$

(27)

$

(28)

$

(111)

$

(110)

Maintenance capital expenditures incurred but not yet paid

5

—

5

—

Capital expenditures associated with construction of Dublin EfW facility

(26)

(30)

(117)

(162)

Capital expenditures associated with organic growth initiatives

(6)

(8)

(33)

(46)

Capital expenditures associated with the New York City MTS contract

—

—

—

(3)

Capital expenditures associated with Essex County EfW emissions control system

(1)

(6)

(4)

(33)

Total capital expenditures associated with growth investments

(33)

(44)

(154)

(244)

Capital expenditures associated with property insurance events

(4)

(5)

(17)

(5)

Total purchases of property, plant and equipment

$

(59)

$

(77)

$

(277)

$

(359)

Covanta Holding Corporation

Exhibit 6

Reconciliation of Diluted Earnings (Loss) Per Share to Adjusted EPS

Three Months Ended
December 31,

Twelve Months Ended
December 31,

2017

2016

2017

2016

(Unaudited)

Diluted Earnings (Loss) Per Share:^(a)

$

1.01

$

0.06

$

0.44

$

(0.03)

Reconciling Items ^(b)

(0.92)

0.11

(0.81)

(0.03)

Adjusted EPS

$

0.09

$

0.17

$

(0.37)

$

(0.06)

(a) For additional information, see Exhibit 1 - Note (b) of this Press Release.

(b) For details related to the Reconciling Items, see Exhibit 6A of this Press Release.

Covanta Holding Corporation

Exhibit 6A

Reconciling Items

Three Months Ended
December 31,

Year Ended
December 31,

2017

2016

2017

2016

(Unaudited)
(In millions, except per share amounts)

Reconciling Items

Impairment charges ^(a)

$

1

$

1

$

2

$

20

(Gain) loss on asset sales ^(a)

—

(1)

6

(44)

Property insurance recoveries ^(a)

—

—

(2)

—

Severance and reorganization costs

—

—

1

2

Loss on extinguishment of debt ^(a)

71

—

84

—

Effect on income of derivative instruments not designated as hedging instruments

—

—

—

2

Effect of foreign exchange loss on indebtedness

—

—

(2)

(1)

Other

1

—

1

—

Total Reconciling Items, pre-tax

73

—

90

(21)

Pro forma income tax impact ^(b)

1

—

(4)

2

Adjustment to uncertain tax positions

—

14

—

14

Grantor trust activity

(11)

—

(9)

1

Impact of federal tax reform rate change ^(c)

(204)

—

(204)

—

Transition tax ^(c)

21

—

21

—

Total Reconciling Items, net of tax

$

(120)

$

14

$

(106)

$

(4)

Diluted Per Share Impact

$

(0.92)

$

0.11

$

(0.81)

$

(0.03)

Weighted Average Diluted Shares Outstanding

131

131

131

129

(a) For additional information, see Exhibit 4 of this Press Release.

(b) We calculate the federal and state tax impact of each item using the statutory federal tax rate and applicable blended state rate.

(c) For additional information, see Exhibit 1 - Note (b) of this Press Release.

Covanta Holding Corporation

Exhibit 7

Supplemental Information

(Unaudited, $ in millions)

Year Ended December 31,

2017

2016

Waste and service revenue:

EfW tip fees

$

572

$

551

EfW service fees

393

406

Environmental services ^(a)

129

104

Municipal services ^(b)

194

186

Other ^(c)

42

36

Intercompany ^(d)

(99)

(96)

Total waste and service

1,231

1,187

Energy Revenue:

Energy sales

288

321

Capacity

46

40

Other ^(e)

—

9

Total energy revenue

334

370

Recycled metals revenue:

Ferrous

48

38

Non-ferrous

34

23

Total recycled metals

82

61

Other revenue ^(f)

105

81

Total revenue

$

1,752

$

1,699

Operating expense:

Plant operating expense:

Plant maintenance

$

311

$

279

Other plant operating expense

960

898

Total plant operating expense

1,271

1,177

Other operating expense

51

86

General and administrative

112

100

Depreciation and amortization

215

207

Impairment charges

2

20

Total operating expense

$

1,651

$

1,590

Operating Income

$

101

$

109

Operating income excluding impairment charges

$

103

$

129

(a) Includes the operation of material processing facilities and related services provided by our CES business.

(b) Consists of transfer stations and transportation component of NYC MTS contract.

(c) Includes waste brokerage, debt service and other revenue not directly related to EfW waste processing activities.

(d) Consists of elimination of intercompany transactions primarily relating to transfer stations.

(e) Includes biomass and China operations in 2016.

(f) Consists primarily of construction revenue.

Note: Certain amounts may not total due to rounding.

Covanta Holding Corporation

Exhibit 8

Revenue and Operating Income Changes - FY 2016 to FY 2017

(Unaudited, $ in millions)

Contract Transitions ^(b)

FY 2016

Organic
Growth ^(a)

%

Waste

PPA

Transactions ^(c)

Total
Changes

FY 2017

Waste and service revenue:

EfW tip fees

$

551

$

(16)

(2.8)

%

$

18

$

—

$

19

$

21

$

572

EfW service fees

406

—

0.1

%

(14)

—

—

(13)

393

Environmental services

104

16

15.6

%

—

—

9

25

129

Municipal services

186

8

4.0

%

—

—

—

8

194

Other

36

7

20.4

%

—

—

—

6

42

Intercompany

(96)

(3)

—

—

—

(3)

(99)

Total waste and service revenue

1,187

13

1.1

%

4

—

28

44

1,231

Energy revenue:

Energy sales

321

(23)

(7.1)

%

5

(25)

10

(33)

288

Capacity

40

7

17.5

%

—

(3)

1

6

46

Other

9

—

—

—

(9)

(9)

—

Total energy revenue

370

(15)

(4.2)

%

5

(28)

2

(36)

334

Recycled metals revenue:

Ferrous

38

9

22.9

%

—

—

—

10

48

Non-ferrous

23

11

48.6

%

—

—

—

11

34

Total recycled metals revenue

61

20

32.5

%

—

—

—

21

82

Other revenue

81

24

29.7

%

—

—

—

24

105

Total revenue

$

1,699

$

41

2.4

%

$

9

$

(28)

$

30

$

53

$

1,752

Operating expense:

Plant operating expense:

Plant maintenance

$

279

$

32

11.6

%

$

—

$

—

$

—

$

32

$

311

Other plant operating expense

898

54

6.0

%

1

—

7

62

960

Total plant operating expense

1,177

86

7.3

%

1

—

7

94

1,271

Other operating expense

86

(24)

(28.3)

%

(10)

—

—

(35)

51

General and administrative

100

12

11.7

%

—

—

—

12

112

Depreciation and amortization

207

(3)

(1.2)

%

3

—

7

8

215

Total operating expense ^(d)

$

1,570

$

71

4.5