COVANTA HOLDING CORPORATION The following MD&A is intended to help the reader understand the results of
operations and financial condition of
Factors Affecting Business Conditions and Financial Results
Impact of COVID-19 on the
The COVID-19 pandemic has impacted, and is expected to continue to impact, our employees, our operations, our business and the economy. The extent of this impact in the future is highly uncertain. We cannot predict the impact of the COVID-19 pandemic, but it may materially and adversely affect our business, financial condition and results of operations. For a full discussion of risks associated with COVID-19 see Part II - Other Information - Item 1A. Risk Factors.
While a limited number of our employees have contracted COVID-19, we have followed recommended protocols and have thus far not experienced material disruptions to our operations as result of workforce availability issues. Depending upon the rate, extent, and location of future COVID-19 infection, more widespread infection of our employees could cause significant increases to operating expense at specific facilities, or curtail operations at such facilities on a temporary basis.
Our WtE plants and material processing facilities provide a vital service to our
municipal and commercial clients. As waste disposal facilities, they have been
recognized as part of Critical Infrastructure by the
In addition, while our operations have experienced only limited disruption to date, we have incurred, and expect to continue to incur, additional costs associated with instituting measures to ensure employee safety, access to contractors needed for construction and maintenance activities, and delays of previously scheduled projects that have been placed on hold or rescheduled to later in the year.
Most of the construction activity on our projects in the
In light of the uncertainty around the macroeconomic impacts of COVID-19, we are
implementing a program of expense reduction intended to mitigate the financial
impacts to our business, with an initial goal of reducing 2020 costs by
• Eliminating all non-essential travel and reducing discretionary spend;
• Enacting a hiring freeze for new corporate employees;
• Lowering compensation through a 50% reduction in payment of CEO's base
salary amount, a 25% reduction in payment of executive leadership base
salary amounts, and a 20% reduction in cash compensation for all corporate
support employees through a combination of wage reductions and furloughs.
These measures are initially expected to remain in place through mid-July
2020 ;
• Lowering the cash portion of board of directors' fees by 60% during the
same time period as management reductions and furloughs;
• Focusing growth investments for the remainder of 2020 primarily on UK
projects and the start-up of our first Total Ash Processing System and
will remain highly disciplined in making any additional discretionary
investments; and
• Announcing plans to lower the annualized dividend payout to
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Commodity Markets - Our quarterly results within an operating year may be affected substantially by movements in commodity markets relevant to our business, principally those relating to energy and metals. As noted above, the COVID-19 pandemic has had a dampening effect on prices in these markets. Such factors have caused, and may continue to cause, the portion of our energy revenue exposed to the market and/or our recycled metals revenue to fluctuate to an extent that may materially affect our quarterly and annual financial results. The commodity markets into which we sell energy and metals are currently at levels significantly below prior periods.
Energy Markets - A portion of our energy revenue is sold under short term arrangements at prevailing market prices. While we have a disciplined program to hedge our exposure to market price volatility (see Item 1. Financial Statements - Note 10. Derivative Instruments), underlying market prices are affected by a variety of factors not within our control such as weather, natural gas supply/demand conditions (including seasonal storage), regional electricity transmission and system conditions, and global demand.
Metals Markets - We sell recycled ferrous and non-ferrous metals under short term arrangements based on prevailing rates that are affected by regional and global demand for specific types of recycled metals. Demand for ferrous metals is not always consistent with demand for non-ferrous metals, or among different types of non-ferrous metals. In addition, recycled metal prices for both ferrous and non-ferrous materials are impacted directly and indirectly by tariff and trade actions both by the US as well as foreign countries. Recent efforts by the US government to place tariffs on imported steel and aluminum have increased domestic demand for our products. The ultimate impact of these tariffs is unclear as retaliation to these tariffs by foreign counties could reduce or eliminate any benefits to us.
The following are various published pricing indices relating to the
March 31, 2020 March 31, 2019
Consumer Price Index (1) 1.5 % 1.9 %
PJM Pricing (Electricity) (2) $ 18.68 $ 30.53
NE ISO Pricing (Electricity) (3) $ 22.23 $ 43.48
Henry Hub Pricing (Natural Gas) (4) $ 1.91 $ 2.92
#1 HMS Pricing (Ferrous Metals) (5) $ 236 $ 306
Old Sheet & Old Cast (Non-Ferrous Metals) (6)
(1) Represents the year-over-year percent change in the Headline CPI number.
The Consumer Price Index (CPI-U) data is provided by the U.S. Department
of Labor Bureau of Labor Statistics .
(2) Average price per MWh for Q1 2020 and Q1 2019. Pricing for the PJM PSEG
Zone is provided by the PJM ISO.
(3) Average price per MWh for Q1 2020 and Q1 2019. Pricing for the Mass Hub
Zone is provided by the NE ISO.
(4) Average price per MMBtu for Q1 2020 and Q1 2019. The Henry Hub Pricing
data is provided by the Natural Gas Weekly Update, U.S. Energy Information
Administration .
(5) Average price per gross ton for Q1 2020 and Q1 2019. The #1 Heavy Melt
Steel ("HMS") composite index ($/gross ton) price as published by American
Metal Market .
(6) Average price per pound for Q1 2020 and Q1 2019. Calculated using the high
price of Old Cast Aluminum Scrap ($/lb.) as published by American Metal
Market .
Seasonal - Our quarterly operating results within the same fiscal year typically differs substantially due to seasonal factors, primarily as a result of the timing of scheduled plant maintenance. We conduct scheduled maintenance periodically each year, which requires that individual boiler and/or turbine units temporarily cease operations. During these scheduled maintenance periods, we incur material repair and maintenance expense and receive less revenue until the boiler and/or turbine units resume operations. This scheduled maintenance usually occurs during periods of off-peak electric demand and/or lower waste volumes, which are our first, second and fourth fiscal quarters. The scheduled maintenance period in the first half of the year (primarily first quarter and early second quarter) is typically the most extensive, while the third quarter scheduled maintenance period is the least extensive. Given these factors, we normally experience our lowest operating income from our projects during the first half of each year.
Our operating results may also be affected by seasonal weather extremes during summers and winters. Increased demand for electricity and natural gas during unusually hot or cold periods may affect certain operating expenses and may trigger material price increases for a portion of the electricity and steam we sell.
Brexit Implications - In March, 2017, the
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on a range of issues, and on
Quarter Updates
Capital Allocation
Our key capital allocation activities for the three months ended
•
•$10 million for growth investments, including$2 million in ourUK equity affiliate and$8 million towards construction of our Total Ash Processing System ("TAPS").
Initiatives to Pro-actively Reduce Costs and Balance Capital Allocation Objectives due to COVID-19 pandemic
In light of the uncertainty around the potential financial impacts of the COVID-19 pandemic, in addition to the cost reduction programs noted above, we:
• will focus growth investments for the remainder of 2020 primarily onUK projects and the start-up of our first Total Ash Processing System; and • have announced plans to lower the annualized dividend payout to$0.32 per share.
New Business Development and Asset Management
• InFebruary 2020 , we reached financial close on the Newhurst project, a 350,000 metric ton-per-year, 42 megawatt WtE facility under construction inLeicestershire, England . Newhurst is our third investment in theUK with our strategic partner GIG. The facility is expected to commence commercial operations in 2023. • InJanuary 2020 , in connection with our Zhao County agreement, we received proceeds ofRMB 61 million ($9 million ) through a loan agreement with a third party. We subsequently contributed the entire amount of the loan proceeds to the equity investment entity which owns the project in the form of a shareholder loan which is convertible to equity.
For additional information on the above transactions see Item 1. Financial Statements - Note 3. New Business and Asset Management.
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CONSOLIDATED RESULTS OF OPERATIONS
The following general discussions should be read in conjunction with the condensed consolidated financial statements, the notes to the condensed consolidated financial statements and other financial information appearing and referred to elsewhere in this report. We have one reportable segment which comprises our entire operating business.
The comparability of the information provided below with respect to our revenue, expense and certain other items for the periods presented was affected by several factors. As outlined in Item 1. Financial Statements - Note 1. Organization and Basis of Presentation and Note 3. New Business and Asset Management in this quarterly report on Form 10-Q and in Item 8. Financial Statements And Supplementary Data - Note 1. Organization and Summary of Significant Accounting Policies and Note 3. New Business and Asset Management of our 2019 Annual Report on Form 10-K, our business development initiatives, contract transitions, and acquisitions resulted in various transactions that are reflected in comparative revenue and expense. These factors must be taken into account in developing meaningful comparisons between the periods compared below.
The following terms used within the Results of Operations discussion are defined
as follows:
• "Organic growth": reflects the performance of the business on a comparable
period-over-period basis, excluding the impacts of transactions and
contract transitions.
• "Transactions": includes the impacts of acquisitions, divestitures, and
the addition or loss of operating contracts.
• Contract "transitions": includes the impact of the expiration of: (a)
long-term major waste and service contracts, most typically representing
the transition to a new contract structure, and (b) long-term energy
contracts.
Certain amounts in our Consolidated Results of Operations may not total due to rounding.
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