Investor Relations
Presentation
September 2008
Cautionary Statement Regarding
Forward-Looking Statements
This presentation includes forward-looking statements within the
meaning of Section 27-A of the Securities Act of 1933, and Section
21-E of the Securities Exchange Act of 1934. Such statements
include declarations regarding the intent, belief, or current
expectations of the company and its management. Prospective
investors are cautioned that any such forward-looking statements
are not guarantees of future performance, and involve a number of
risks and uncertainties that can materially affect actual results as
identified from time to time in the company’s reports and
registration statements filed with the Securities and Exchange
Commission. Forward-looking statements provided herein as of a
specified date are not hereby reaffirmed or updated.
Introduction to Covanta
• World’s largest owner/operator of Energy-from-Waste
(EfW) facilities
• Business serves two key markets & addresses two
key issues:
– Waste Disposal
• Superior sustainable alternative to landfills; cleaner &
preserves open spaces
– Generation of Clean, Renewable Power
• Entire process results in net GhG reductions
• Complementary businesses include
– Biomass and other renewable energy generation
– Waste procurement and transfer stations
Key Investment Considerations
• Largest player in a growing niche (EfW) with high
barriers to entry
• Contracted revenues provide predictable base
business
• Increasing exposure to electricity pricing provides
upside when fossil fuel prices rise
• Strong balance sheet and free cash flow generation
support growth initiatives
• Stability and Growth: consistent operating
performance coupled with increasing expansion and
greenfield opportunities
How does EfW Work?
• Municipalities and others pay us to dispose
of waste
• Technologically advanced facilities combust
waste, our fuel, at high temperatures
• Resulting steam is either sold directly or used to make
electricity for sale
• Metals are retrieved and recycled
• Ash residue is buried or recycled for use in
construction and road building applications
Benefits of EfW
• Environmentally sustainable waste disposal
– Most attractive solution after recycling
– Waste volume reduced by 90%
– Reduces landfill usage and long-haul transport
• Generates clean, reliable energy from renewable fuels
– U.S. EPA states EfW: “produces electricity with less environmental
impact than almost any other source”
– Baseload power 24/7
• Reduces greenhouse gas emissions; combats global warming
– 1:1 CO2 offset for each ton of waste processed
• Fewer fossil fuels burned: 1 ton of waste ≈ ¼ ton of coal
– Methane from landfills: global warming capacity 20+ times CO2
Global Drivers for EfW
• Increasing waste generation – population growth &
urbanization
• Landfill capacity constraints; legislative directives to
reduce landfill usage
• Climbing fossil fuel prices; reserves being depleted
• Demand for renewable power generation
• Focus on energy security and diversity
• Growing attention to climate change; desire to
reduce greenhouse gas emissions
Global Waste Management
Landfill
EfW 0.2 Billion tons
Recycling 0.5 Billion tons
Recycling/
Composting
Landfill 1.2 Billion tons
U.S.
≈90 EfW facilities
Western Europe
≈400 EfW facilities
China
Singapore
Taiwan
Japan
Ireland
U.K.
Italy
Average
Germany
Netherlands
Sweden
Denmark
U.S.
EfW
Asia
≈300 EfW facilities
Substantial Growth Potential
• Waste generation increasing with population
and income growth
• Landfilling still the predominant disposal method
– China: approximately 280 million tons
– U.S.: approximately 250 million tons
– UK and Ireland: approximately 50 million tons
• Reduce. Reuse. Recycle. Then recover waste to
watts!
Covanta’s Competitive Advantages
• Operational Expertise
– > 20 years experience; design, construction, operations &
maintenance
– Operate every commercially viable EfW technology
– Since 1992, EfW boiler availability generally exceeds 90%
– Senior & facility management: 17+ years average experience
– Recipient of numerous environmental and safety awards
• Global presence; local experts and relationships
• Willingness and ability to commit capital
• Strong track record of successful public/private
partnerships
Growth Strategy
• Maximize long-term value of existing portfolio
– Extend contracts for operation and waste delivery
– Implement productivity enhancements
– Facility expansions
• Acquisition and greenfield development :
– North America – EfW, renewable energy & complementary
businesses
– Europe – primarily EfW; focus on UK and Ireland
– Asia – primarily EfW; focus on China
• R&D – Invest in new technologies
U.S. – ≈85% of CVA Revenues
•
Handle over half of U.S. EfW volume (16 of 30 million tons) or 5% of postrecycled MSW
•
Produce almost 10% of America’s non-hydro renewable electricity – enough to
power over a million homes
•
Operate in 18 states (assumes ME acquistion closes), concentrated in the
densely populated Northeast
•
35 EfW; 8 biomass (assumes ME acq. closes), 4 landfill gas facilities & 2 hydro
Covanta EfW Facility Locations by State
Annual Tons Processed by State
Other
6%
MD
4%
NY
18%
HI
4%
IN
4%
MI
6%
NJ
10%
CT
8%
PA
10%
Covanta
MA
13%
VA
9%
FL
8%
•
U.S. - Strong Fundamentals
Waste Disposal
–
–
–
•
Power Production
–
–
•
Recession resistant, non-cyclical business ; historical long-term growth rate of ≈3%
Rising prices due to capacity constraints & barriers to entry
Higher diesel costs and state landfill tax make long-haul disposal less attractive
Rising prices due to higher demand & higher fossil fuel prices;
Energy security concerns
Energy-from-Waste - Opportunities for new capacity re-appearing
–
–
Growing interest in integrated waste management and renewable energy
Concern with global warming and reducing carbon footprint
Dollars per MWH
Average PJM Electricity Price Trends
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
2002
Source: EPA
2003
2004
2005 2006
2007
2008
YTD
Note: PJM (Pennsylvania, New Jersey, Maryland grid) – East Zone (LMP)
Source: PJM Day-Ahead Spot Market Price. 2008 YTD data through August.
Typical U.S. EfW Contract Structures
•
•
•
Waste disposal contracts are
structured as either “tip fee” or
“service fee”
–
Service fee facilities can be owned and
operated by Covanta or just operated
–
Prefer longer term contracts to ensure
“fuel” supply
Energy revenue traditionally under
long-term contract; portfolio shifting to
shorter term
Facilities by
Contract Type
Service
Fee
Owned
Tip Fee
Owned
EfW projects generally financed with
municipal bonds
–
Project debt usually paid over term of
waste disposal contract (≈ 20 years)
Service
Fee
–
Service fee contracts include debt service
payments
Operated
–
Debt free facilities after initial contract
period
North American Initiatives
• Contract roll-overs; potential energy revenue upside
– Indianapolis and Hempstead
• Expansions of existing facilities
– Florida and Hawaii
• Pursuing greenfield projects
– Vancouver
– Toronto
– Maryland
• M&A Activities
– Tulsa
– Maine biomass facilities
– Transfer stations
U.S. Energy Policy
• Federal and numerous state laws considers EfW a
renewable energy source
• Still no comprehensive U.S. renewable energy or
climate change policy
– Potential upside if EfW included in Federal renewable energy
portfolio standards
– Exemption from carbon caps would provide business
advantage over fossil fuels
– Recognition of GhG offsets would offer substantial upside
Growth Drivers - Europe
• Widespread acceptance of EfW is creating opportunities
• EU Landfill Directive: supports EfW, disincentives for landfilling
– Reduce landfilling of biodegradable MSW by 65% from 1995
disposal levels by 2020
• U.K. and Ireland – Significant efforts needed to meet EU
regulations
– U.K. environmental agency (DEFRA) estimates EfW will need to
increase from 9% of waste disposal to 27% by 2020
– U.K. market – expect 10 million tons of new EfW capacity to be
required
– High market tip fees (>$100 per ton of MSW) and electricity rates
• Additional opportunities in continental Europe
UK/Ireland Initiatives
•
•
•
Dublin: 1,700 tpd facility – construction expected to begin near end of
2008
UK – Large number of municipalities considering projects
– Currently, short listed on several
– Additional opportunities are unfolding each year
Covanta Infrastructure Preparedness
– Office in Birmingham being expanded to meet heightened level of
activity
– Employing locals with local expertise and valuable relationships
Artist’s Rendering - Dublin
Growth Drivers – Asia/Pacific
• China: significant opportunity
– 160 - 170 cities with population of 1 million +
– Annually generating 280 million tons of waste
(similar to U.S. market)
– Approximately 2.0% of waste was converted to
energy in 2005
– National Plan: 30% of waste to be channeled to
EfW by 2030
– Estimates predict 50 million tons of new EfW
capacity to be built by 2020
China Initiatives
• Pursue bid opportunities with strong local partners
– JV’s with Chongqing Iron & Steel and Guangzhou Development
Group
– Currently own stakes in two 1,200 tonnes per day EfW facilities via
JV’s
– Recent contract award for new 1,800 tonne per day facility in
Chengdu
SanFeng – Covanta Tongxing EfW Plant – Chongqing, China
Attractive Economics
• Stable business model
– Long-term contracted revenue stream
– Credit-worthy clients – municipalities and utilities
• High margins and low capital expenditure requirements
– Annual maintenance capex: ≈ $60 million (4% of revenue)
• Strong operating cash flow to fund growth (1)
– 2008 operating cash flow guidance: $380 to $420 million
– 2008 scheduled project debt amortization of $167 million (with
approximately $20 million funded from restricted cash)
• Strong balance sheet
– Borrowing power increasing as facilities become debt-free
(1) As of July 29, 2008. This information is not being reaffirmed or updated
as of the current date.
Financial Summary
2007
YTD 6-30-07
YTD 6-30-08
Revenues
$1.43 billion
$685 million
$812 million
Adjusted EBITDA (1)
$549 million
$245 million
$268 million
Operating Cash Flow
$358 million
$146 million
$160 million
Net Income
$131 million
$19.8 million
$59.6 million
Diluted EPS
$0.85
$0.13
$0.39
(1) Non-GAAP financial measure – Please see second quarter press release for discussion of
use of Non-GAAP financial measures and calculation of Adjusted EBITDA.
Consistent Financial Performance and Growth
Revenues
$1,450
$1,433
($ in millions)
$1,400
$1,350
$1,300
$1,269
$1,250
$1,209
$1,200
$1,150
$1,100
$1,050
PF2005
2006
2007
Consistent Financial Performance and Growth
Operating Cash Flow (1)
$400
$358
($ in millions)
$350
$311
$300
$250
$208
$200
$150
$100
$50
$0
2005 (2)
2006
2007
2008 Guidance: $380-$420 million (3)
(1)
Operating Cash Flow is defined as the GAAP measure cash flow provided by operating activities.
(2)
Includes the results for Covanta ARC Holdings from June 25, 2005 through December 31, 2005.
(3)
As of July 29, 2008. This information is not being reaffirmed or updated as of the current date.
Consistent Financial Performance and Growth
$700
Adjusted EBITDA (1)
($ in millions)
$650
$600
$550
$500
$542
$549
2006
2007
$501
$450
$400
PF2005 (2)
2008 Guidance: $550-$575 million (3)
(1)
(2)
(3)
Please see second quarter press release for discussion of use of Non-GAAP financial measures
and calculation of Adjusted EBITDA.
Calculated for Covanta Energy Corporation.
As of July 29, 2008. This information is not being reaffirmed or updated as of the current date.
Computation of Adjusted EBITDA
(In millions)
Full Year
2007
YTD
6-30-08
Full Year
Estimated 2008
Net Income
$131
$60
$140 - $155
Depreciation and amortization expense
197
100
206
Debt service
111
50
95 - 92
Income tax expense
31
34
78 - 85
EBITDA
470
$244
$519 - $538
Adjustments for non-cash items
39
20
24 – 30
Loss on extinguishment of debt
32
0
0
Minority interests
9
4
7
Adjusted EBITDA(1)
$549
$268
$550 - $575
(1) As of July 29, 2008. This information is not being reaffirmed or updated as of the current date. Please see
second quarter press release for discussion of use of Non-GAAP financial measures and calculation of
Adjusted EBITDA.
Reconciliation - Cash Flow: Adjusted
EBITDA
Full Year
2007
YTD
6-30-08
Full Year Estimated
2008
$358
$160
$380 - $420
Debt service
111
50
95 – 92
Amortization of debt premium and deferred financing costs
11
4
7
Other
69
54
68 - 56
$549
$268
$550 - $575
(In millions)
Cash Flow Provided by Operating Activities
Adjusted EBITDA(1)
(1) As of July 29, 2008. This information is not being reaffirmed or updated as of the current date. Please see
second quarter press release for discussion of use of Non-GAAP financial measures and calculation of
Adjusted EBITDA.
Key Investment Considerations
• Largest player in a growing niche (EfW) with high
barriers to entry
• Contracted revenues provide predictable base
business
• Increasing exposure to market electricity pricing
provides upside when fossil fuel prices rise
• Strong free cash flow generation and balance sheet
support growth initiatives
• Stability and Growth: consistent operating
performance coupled with increasing expansion and
greenfield opportunities