Q3 2020 Covanta Holding Corp Earnings Call
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Vice President of Investor Relations. Please go ahead.
Thank you and good morning, welcome to Covantas third quarter, 2020 College school and discussion of our recent announcements joining me on the call today, we'll be Sam Zell, our chairman of the Board My Granger, our president and CEO and Brad Helgeson, our CFO on today's call Sam will discuss the most recent management transition and strategic review, Mike will provide color on his background and goals.
And Brad will provide an operational and financial update afterwards, well take your questions.
During his prepared remarks, Brad will be referencing certain slides, we prepared to supplement the audio portion of this call. These slides can be accessed now or after the call on the Investor Relations section of our website www dot com and Dot com. These prepared remarks should be listened to in conjunction with these right now.
Now one of the Safe Harbor and other preliminary notes.
The following discussion may contain forward looking statements and our actual results may differ materially from those expectations information regarding factors that could cause such differences can be found in the Cubs reports and registration statements filed with the SEC.
The content of this conference call contains time sensitive information that is only accurate as of the date of this live broadcast October 30 from 2020, we do not assume any obligation to update our forward looking information unless required by law any redistribution retransmission or rebroadcast of this call in any form without the expressed written consent of Covanta is prohibited.
The information presented includes non-GAAP financial measures because these measures are not calculated in accordance with GAAP. They should not be considered in isolation from our financial statements, which have been prepared prepared in accordance with GAAP for more information regarding definitions of our non-GAAP measures and how we use them as well go to patients to their usefulness for comparative purposes. Please see our press release, which was issued last night.
And was furnished to the FCC on form 8-K with that I'd now like to turn the call over to our chairman of the Board Sam Zell Sam.
Good morning.
Good morning, everybody happy Halloween to everybody.
Joining the conference call today to discuss the changes, we announced last night, which lay the foundation for <unk>.
Future of Covanta.
<unk> is the worlds, leading waste energy company, well with operational expertise and a portfolio of irreplaceable assets.
Our unmatched in the industry.
Our underlying business is fundamentally strong which should be clearly demonstrated during the pandemic.
Provide reliable essential service try municipal commercial customers generating consistent cash flow.
In addition, we have had very attractive growth opportunities ahead of us, particularly the expansion of our business in the United Kingdom.
However, the board believes that the company's assets in growth potential have not been appropriately valued in the market.
And therefore, we don't see we are announcing his strategic review, but the objective of identifying the optimal path to maximize value for our shareholders.
The company has pursued several initiatives in recent years.
Growing our presence overseas, it's we're expanding our capabilities in sustainable environmental services metals recovery and processing and the continuous improvement in core client operations either.
He'd have created value in our business that value has not translated into our stock price.
Demonstrator will fashion.
Now is the time in the company's evolution to reassess our strategy and.
Leverage your strength.
Clarifier priority every.
Everything will be on the table for review.
Putting our absent an operations growth priorities and capital structure.
Lead candidate to lead this review and the successful execution of any resulting actions.
Board has appointed Mike Ranger, as President and CEO [laughter].
Mike joined the board in 2016.
And we are very fortunate to have someone of his caliber ready to step in but this task.
Mike has an ideal skill set for this with decades of experience in power infrastructure spaces, you clean waste to energy driving strategic and structural improvement in public and private companies I'm excited about the opportunities for this company I'm confident in our future direction.
Under Mike's leadership, I'd now like to turn it over to Michael.
Thanks, very much Sam.
Good morning, everyone I'm I'm I'm very excited to be joining the management team and a leadership position at at Covanta at this a very important point and the Companys future.
As Sam mentioned, I know covanta and its business well, having been on the board for four years and prior to that as a as a.
Private equity Investor chaired the board of American rough feel one of our Covantas primary legacy companies.
Outside of Covanta I've spent my entire career in investment banking and private equity and are focused on programs and transactions to unlock value at companies across many industries, but principally include corporate principally focused on energy power and infrastructure businesses and.
At its core the waste to energy business is straightforward, we provide a sustainable environmentally superior alternative to landfill, we operate our facilities safely and reliably our fuel supply for generating renewable power is also our largest revenue source our assets are irreplaceable and are mutually beneficial customer relationships aspire.
Actually with our host municipalities are decades long.
However, this business has complexities in many areas that need to be assessed and that will be my near term focus we're planning a comprehensive strategic review, including operations cost structure assets business lines and geographies.
Cost structure is going to be very important and all this capital allocation policy and balance sheet targets.
If we believe that course of action will increase shareholder value, we will pursue it [noise].
There are no specific preset expertise expectations for this review and it has no scheduled end date.
As we reach conclusions and begin to execute our plans we will communicate them clearly.
An initial step we are streamlining and enhancing our executive management team very <unk> is now our chief operating officer, assuming responsibility for all operational and commercial activities and our North American waste to energy business.
This will drive improved accountability and more efficient decision, making.
We also announced yesterday on Michaels and Covanta Board member since 2018 low.
Located in the UK will be joining management.
Early next year to lead our growing business in the UK as president of Covanta Europe.
These most established clear leadership in both regions, while highlighting the importance of our overseas operations.
I appreciate the confidence of the board and and moving forward on this strategic review and reporting back to you as the strategic review process has met milestones that we can acknowledge to you at that point in time.
With that I'd like to turn this over to Brad Hellickson, who will go through our third quarter results.
Thanks, Mike and good morning, everyone and for those using the web deck I'll begin on slide three.
During the third quarter, we reported a $128 million of adjusted EBITDA slightly above Q3 last year and $3 million. The free cash flow was 84 million of free cash generated year to date.
In a challenging environment, we maintained our focus on operating safely and reliably.
During the third quarter, we sustainably processed five and a half million tonnes of waste at our waste to energy facilities consistent with last year.
We are a critical disposal outlet for municipal solid waste in the major markets of northeast corridor, as well as for commercial and industrial customers that value our non landfill waste solutions.
I'd like to share two recent examples of customers, who chose covanta for the strategic advantages that we offer including economics proven reliability reduced environmental footprint.
On the waste side, we recently reached an agreement with the town of North Hempstead on long Island for a long term waste disposal contract at our Hempstead facility.
Well proximate to our facility the town has historically relied on long distance trucking up its waste to landfill off the island.
However by contracting with us the town is transitioning to a cost effective and sustainable local solution.
From our perspective, the contract significantly reduces our need for spot waste supply at one of our key merchant labs locking in approximately 150000 tons of largely residential waste at an attractive rate it.
It's a mutually beneficial outcome.
On the energy side, we recently agreed to a seven year extension of a steam supply contract for a neighboring industrial facility at our Niagara plant.
By continuing to purchase steam from us this customer avoids the need to burn fossil fuel to meet its process needs, which has both environmental and economic benefits.
From our perspective, selling steam is more efficient and economically attractive and selling power.
These two examples are indicative of how our sustainable solutions drive value both for us and our customers.
During the quarter, we continued to see recovery in commercial and industrial waste volumes from the initial months of the pandemic.
For us this translates to a higher average tip fees that are merchant plants as the return of our normal commercial MSW and profiled waste volumes reduces our need to procure lower priced replacement tonnes in the market.
Well softness remains in certain specific areas at this point, we've largely returned to pre pandemic levels.
During the quarter, we saw same store tip fee growth, 3% on a year over year basis, and we estimate that the impact of the pandemic on our weighted average tip fee is down less than a dollar a ton.
We saw 2% same store growth on profiled waste revenue year over year, which represents a 10% sequential improvement from the <unk> from the second quarter.
From an end market perspective demand has remained strong in sectors, such as consumer products and health care, while the automotive sector, which was one of the weakest during the second quarter showing signs of recovery.
At our material processing facilities environmental services revenue was down just 2% year over year and up 15% on a sequential basis from the second quarter, given the recovery in our heavily industrial customer base.
Importantly, as we discussed last quarter, our environmental solutions team has effectively flexed variable costs and.
And was able to drive year over year EBITDA improvement in the quarter, even on lower revenue.
Operationally the pandemic is presented numerous challenges, including new safety protocols and higher costs in several areas.
However, our world class operating team has navigated this difficult environment impressively.
During the third quarter, even with a higher level of scheduled maintenance activity, we were able to achieve 93% waste to energy boiler availability, which was in line with last year.
As previously noted we expect maintenance expense this year to come in at approximately $15 million above initial estimates as a result of rescheduling outages from earlier in the year and the higher cost to performing these activities off cycle and with Kobe protocols.
Our previously announced cost reduction programs, partially offset these negative impacts with $8 million reflected in the third quarter.
In total we reduced cost by $18 million with this program and expect a full year benefit of between 20 and $25 million.
Before moving onto the financial details of the quarter I'd like to provide a brief update on our UK growth activities.
As you know we have three facilities under construction in the UK right now construction.
Construction at the Rookery project continues to progress on schedule and we anticipate commercial operations in 2022.
But the real estate project construction has resumed following the kobin related delays mandated by the Scottish government earlier this year.
We'll provide updates on schedule for this project as construction progresses.
As you can see from the picture on the top right of the slide numerous project is off to an excellent start after only five months of construction and we're very excited about its progress to date we've.
We expect commercial operations at new Hearst in 2023.
On the development of the Protos project. We have commenced early works on the site and are in the final stages of the project financing process.
We're still targeting financial close at this project by year end.
In summary, our very promising growth activities in the UK continued to move forward in our development team is focused on additional earlier stage projects to build our pipeline.
We hope to be in a position to share details on new opportunities as they progress in coming quarters.
I'll now turn to reviewing quarterly financial results in a bit more detail beginning on slide four.
Total revenue in the quarter was $491 million up 26 million or 6% from third quarter 2019, driven primarily by organic growth.
Waste pricing contributed $7 million with 5 million related to higher tip fees and $2 million from service be escalation.
On the energy line, we saw a 12 million dollar increase in revenue associated with the additional tranches wholesale load serving that we won at auction earlier this year.
Service under these tranches began in June and benefited from strong residential electricity demand in the third quarter.
Commodity prices increased revenue by 2 million, primarily related to higher capacity right Mark.
Market power and metals prices were largely flat year over year.
Asset divestitures reduced revenue by $1 million in the quarter, while long term contract transitions added 2 million.
Now moving on to slide five.
Adjusted EBITDA was $128 million in the quarter up $3 million compared to Q3 2019, we.
With inorganic growth of $2 million, we benefited from the new wholesale load serving contracts higher EBITDA from Covanta environmental solutions and lower overhead on a year over year basis.
These were partially offset by lower EBITDA in the waste to energy plants as higher waste revenue was offset by higher operating cost in the quarter, including planned maintenance.
Commodity prices were a net million up $1 million benefit to adjusted EBITDA, while a long term contract transition out of a million dollars.
Year to date, we have generated 321 million of adjusted EBITDA.
Looking at the fourth quarter as we've discussed on previous earnings calls you should expect higher plant maintenance expense compared to last year with a corresponding impact on revenue from the associated outage downtime.
This is reflected in our full year outlook on these line items included in the appendix to this presentation.
Now turning to slide six free cash flow was $3 million in the quarter compared to 22 million in Q3 2019.
This delta was essentially driven by higher scheduled capital expenditures in the quarter.
Consistent with my comments on maintenance expense, we also expect higher capex than typical in the fourth quarter.
Again this is entirely a function of our planned maintenance schedule. This year, the timing of which was further impacted by outage deferrals from earlier in the year due to the pandemic.
Now please turn to slide seven where I'll briefly update our current growth investment activity.
As discussed previously we have focused our growth investment in 2020 on the UK projects and the startup of our total last processing facility or taps.
We spent $11 million year to date on tops, including 3 million in Q3, and still anticipate approximately $15 million in total this year.
Year to date, we've invested $11 million in UK development, including initial spending on the on the numerous project and purchasing the land for the Protos project.
I'll wrap up my comments by touching on the balance sheet. Please turn to slide eight.
At September 30, net debt was approximately $2.5 billion, a $37 million increase from June 30.
Our consolidated leverage ratio was 6.0 times unchanged from the end of the second quarter and our senior credit facility Covenant ratio was 1.9 times down from Q2 as a result of a tax exempt bond refinancing that I'll describe in a moment.
Liquidity remains very strong at $444 million available under our revolving credit facility at quarter end.
During the third quarter, we executed two debt refinancing transactions that together reduced annual interest expense by approximately $5 million extended our debt maturity profile and increased structural flexibility.
And the tax exempt market, we refinanced two series of bonds totaling $129 million with new 20 year notes at an average coupon of 3.7% reducing costs by approximately 150 basis points.
In addition, as part of the refinancing we removed the upstream operating subsidiary guarantees on the existing bonds, thereby reducing our balance of senior debt for purposes of the credit facility Covenant ratio.
In the taxable bond market, we refinanced $400 million Apollo yield notes due 2024 with new tenure notes due 2030, I do think the coupon from five and seven 8% to 5% flat.
With these proactive transactions, we were able to capitalize on attractive debt market conditions and strong demand for Covanta credit.
We will continue to look for opportunities to optimize our debt structure and reduce our cost of borrowing.
With that operator, we'd like to move to the Q and a portion of the call.
Ladies and gentlemen at this time, we'll begin the question and answer session.
I ask a question you May press Star and then one using a touchtone telephone.
Withdraw your question you May press Star and two.
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Once again it is star then one to ask a question.
And our first question today comes from Noah Kaye from Oppenheimer. Please go ahead with your question.
Thanks, and good morning, everyone and while I would certainly love to delve into the.
Dynamics of the improving fundamentals in a moment.
I'd like to begin with the question Sam into Mike as well if you want to address here. Sam you said at the beginning of this call that the company's assets and growth potential and not appreciated by the market and that is really what's triggering.
The reassessment of that strategy.
And clarification of priorities here I guess I would ask what are the aspects of the business that you feel are particularly under appreciated.
And how do you think about.
The company's structure going forward, you've now formally named a European.
Market head, obviously, that's where more of the new project growth is coming from.
Maybe just help us understand a little bit what exactly you think is is under appreciated here and whether this is a response to the market conditions are what do you think there is something structurally at covanta that you're hoping to change.
Well I think like that.
Let's try and answer to your question one at a time.
I think it's very obvious.
Gotcha.
We place a great deal of value on our high graded assets, they're performing just beautifully and we're right on our way around or ahead of our original plan.
A similar set of assets frequently trade.
And that was finished.
Give or take 18 months to 24 months from now.
Trade is 18 times, which you know if you have any kind of analysis.
I think you conclude that the British assets here are worth more than the stock price. You currently are trading at on the New York Stock Exchange.
That's number one number two I think that.
And as Jim almost all situations. So the 80 20 rule applies and we're confronted with a.
A bunch operating plants in the United States, you know at 20% of them produce all the profit.
The question, we have and you have to ask ourselves is is their benefit in maintaining the other 80%.
And in what way and how that's certainly one of the questions you're asking.
Third area is we have a separate business so yes.
Which is basically a wage transportation business that we built and is growing very well and that's we feel that if that were well separately looked upon as a business.
That also would generate a higher value than what what are you seeing any.
I can't help but look at the stock price and say, okay. What are the pieces work and.
And my judgment is that the pieces there were significantly more and its trading for and that we haven't added correctly.
Laid out a strategy I did it didnt extreme confidence to in effect.
Value our stock appropriately. So that's that's really the essence of what we're doing here.
Weve talked there was you know requiring a really radical change in wealth management and how we go forward Michael right now was right on the board originally because he had waste to energy capabilities and knowledge and with and as he said so this summer.
And Brett fuel.
So we really had a perfect person there to address this question and obviously, having all in <unk> available to really you know corner and I'm not a real operation in England, where the overall market conditions.
Political conditions are much more favorable.
To this business than they are in the United States.
Michael.
Thank you Sam I would only add that what this really Sam Sam summarize this very well is each each of our business lines have different characteristics and what we're going to try to do is to focus on exactly what those characteristics are and how to manage them for their highest value.
Whether that be on a consolidated basis or if we have opportunities.
To segregate some of those businesses.
On top of that.
By appointing Garik is the chief operating officer for North American operations, we're bringing together both the commercial revenue side of our business and our expense side. So we can manage this on a margin basis and as Sam pointed out that will that will put a bright light on our.
Portfolio optimization in in North America to figure out, which which plants are the most valuable to us and what the alternatives are too to run those and then also to assess the viability of the rest of the portfolio. So I think thats a very good way for Sam to have laid this out and we're going to as I you said.
We're getting the businesses and focusing on how they look on a standalone basis that will help us better understand their value on a consolidated basis to covanta.
Yeah.
Gentlemen, I think thats very helpful explanation of what you're looking to do here and it sounds like you may have some near term steps that you know well will help move this forward.
So with that let me just leave it and ask you quickly about.
The fundamentals outlook here and effectively you know Youre Youre waste services revenue outlook now basically you know near the lower end of your pre pandemic level that and the outlook that you provided back in February or to say it another way.
It looks like were almost fully back on track here in terms of the waste side of the business I just want to understand as you look out maybe.
Maybe into next year thinking about contract structures and renewals.
And what you're seeing now in mix is there anything that prevents you from kind of getting back to say like a 3% type a total year revenue growth and not just the price next year is there anything we should be considering that would prevent you from doing that.
I know, it's Brad no nothing nothing specific to US certainly I think as Weve as weve seen through this year and as we've talked about I think that the story for us on.
On the waste line, all right across the business, but but focusing on the waste line is going to be that the story of the macro environment.
What what does the economic recovery look like going into next year, where are we with the pandemic et cetera.
So all else being equal to look at it that way Theres No reason why we wouldn't resume the growth trajectory on the waste line that we've talked about because all of all of the the specific drivers to covanta. The secular drivers for Covanta are are entirely unchanged.
All right I'll leave it there thank you.
Thanks.
Our next question comes from Michael Hoffman from Stifel. Please go ahead with your question.
Thank you very much.
The with regards to the outlook just to be more specific you all have had a 3% to 5% same store tip fee growth outlook that should translate into sort of 10 to 15 million of free cash flow growth annually.
What I'm think I heard is you're back.
At that point again.
Yes, essentially that's right yeah, I think the the one caveat I would put on that is.
We're most of the way back I would say, we're not all the way back so we're not all the way back up.
Across the end markets on profiled waste and as you know a ton of profiled waste is very impactful for us overall on on the growth rate and average tip fee. So.
With that as the coffee yacht, Yeah, I think we are yeah.
We are essentially back to where we were in and and looking at the at the at the future in a similar fashion again with the other caveat that.
This is all subject to the to the direction of some of the macro environment.
Right and just to remind everybody the profiled waste and I'm oversimplifying it as its drugs money and close sold at a high average tip fee.
And if that was back to pre close with is that close that dollar gap or does it exceed it.
Well.
I think what we're talking about is sort of the big gap to where we were so right.
Yeah. So once.
Once that gap is closed we're fully back to where we were.
I don't know, but profiled waste for 100% back does that.
Only covered or more than cover that gap.
Well I mean, maybe work we're talking path to each other.
So.
Yeah, I think we anticipate annual growth in profiled waste going forward. So essentially if we're back to where we were pre cove. It weve lofty year essentially from a growth perspective.
But yeah, we would expect future to resume the trajectory I'm not sure if I'm if I answer your question.
No probably not asking it very well, so I'll I'll shift gears and move over to Sam and Michael.
So Sam a colleague of mine a friend of Yours Auto Shooties says that you always make the comment it's all about the cash flow. So what do you think this portfolio is supposed to be doing cash flow wise and and what do you think the right target leverage ratio is total debt leverage ratio for whatever the surviving port.
Well it looks like.
If I knew the answer to your question and I wouldn't need to do what we're doing.
Obviously, I don't believe we have maximized our cash flow.
Obvious where I believe we are spending money.
Maybe that should be you spent by our partners.
On the facilities not us as operators.
I, just you know I I.
I think there's a number of things going on here that.
We need to add and analyze and focus on there is no question that ultimately I measure every company I've ever been involved with based on understanding cash flow.
And and this one is no different and I think what you're seeing here is true is that you know pretty.
Pretty radical change in direction with the goal of maximizing value and not and if the answer is that we can't get that value as the stock price then we'll get it at ash and move on.
So I think you know, we're not not not take anything off the table Oh, we think fits.
Great opportunity here, we like the quality of the assets we have.
We're not packaging them as well as we should be we're changing management here with the goal of reaching those objectives.
And do you have a target leverage that you would like to be I'll answer that this is Mike.
Michael So I think the answer to that would be depending upon the valuation of the components of the business and how we would realize on those would would send us in the direction of of being able to target what we want the capital structure to look like and clearly from a leverage perspective, the target is going to be lower than we presently are today I mean, that's going to be one of.
The clear objectives of this is to bring our leverage levels in line with our cash flow file ability and our generation of EBITDA, So thats going to exactly be the the way we look at this from a almost an equation point of view.
And one last one for me is when you say strategic view everybody immediately jumps the conclusion and possible sale I am not let's say hearing that's really the objective it's be public but be smaller leaner better baseline free cash flow with a growth profile.
Well I mean, let's.
Let's be very honest.
Being public is not cheap.
And you do need you want to be public is because you get a value and you'd have liquidity, if we're not getting that and we have to reassess and look at your question.
From every perspective, and that's what we're saying we're doing.
Yeah.
Okay, and why didn't you are obese and when we will be responsive to the indications of value from the market you know in in either our components are in totality. So that you'll be have to be responsive to that if your objective here is to maximize shareholder value.
Okay very good. Thank you very much good luck.
Thanks, Michael.
And our next question comes from Jeff Silber from BMO Capital markets. Please go ahead with your question.
Thank you so much first of all thank you for for.
Clarify some of the answers the point I think there were very helpful.
First question is for salmon for Mike.
Sam I think you said many times that you thought that there was more value in this company into the market was attributing it why make this move now why wasn't this done in six months about 12 months ago I'm just curious in terms of the timing.
Well the reality is that every decision I've ever made.
Hi in retrospect should've been done 12, or 24 months ago.
I think that got the extreme.
Your friends between what we think the value and the price of the stock trades that has certainly been a major.
Incentive for us to take the steps that we've taken.
So it's one thing if you think your 20% undervalued and another thing if you think that the spread is a 100%.
Or whatever it might be.
Alright fair enough I appreciate that let me shift over just to the business.
I know the company had withdrawn guidance youve not reinstituted that as of yet what would you have to see before reinstating guidance does this change your view kind of put that on the side I'm just curious your thought process.
Yeah, Hey, Jeff It's Brad.
Oh really I'll answer it in two parts.
Addressing 2020 2021 separately so so for 2020.
At this point in the year here at the end of October and given our results year to date and I think what's pretty clear in the actual results in terms of the recovery of the business frankly.
Frankly, we felt that reinstituting guidance was.
It was it was probably unnecessary it also would be inconsistent with.
Our our policy historically, where we don't really we don't really focus on quarter to quarter and due.
Due to reinstitute formal guidance, where in effect at this point given quarterly guidance, which.
Again, we just thought.
Given where we are in the year and also given the other things that we're talking about on this conference call probably wasn't necessary.
For 2021, that's a different question because of course, our art. Our typical approach is to give financial guidance for it for the coming year. When we report fourth quarter earnings in that in the first quarter.
Given given the the the current level of macro uncertainty, it's really difficult for us to say I think today, where we think we're going to be both from that perspective and also.
Depending on where we are in the strategic review in the direction that may be heading difficult to say today will be specifically in a position to give next year.
Yeah, I think safe to say that we will be giving.
More of an outlook for next year in in February We report earnings, but the specific nature of it TBD. So Jeff as we sit here on on October Thirtyth, you can imagine that with the changes announced yesterday, our budgeting process for next year will begin a new in earnest on Monday, and so that will.
Reflect some of the objectives and what we think the wins can be in the strategic review going into it so.
We're we're making it as we speak right now but.
Your observation that the strategic review will have.
Impact on what we think the budget should look like and what guidance could possibly be for 2021.
Okay I appreciate the color. Thanks, so much.
Thanks, Jeff.
Our next question comes from Mario Corso Lucky from Jefferies. Please go ahead with your question.
Hi, Thank you for the time Mike.
Mike I was actually just curious to know and then you can give us. Some examples of strategic you Im sorry strategic reviews, you have done in the past.
Or maybe some examples of turnarounds that you've been involved in what went right. What went wrong. What did you what your realized what was wrong. It and how did you how do you think you fix that.
You know with it.
Unfortunately, there is a once upon a time answer to this too because it's been a long career, but clearly in the energy and power space.
Whether you go back to the the cancellation of the Midland nuclear plant by CMS energy and the.
Finance, the financing and conception of the Midland cogeneration venture and how that works and in that circumstance.
We took our investment banking fee in stock appreciation rights, because we wanted to be on the same side of the table as the as the company and then probably the two to really point out would be taking El Paso electric out of bankruptcy, which we did a top to bottom.
DLJ top to bottom re re work of the entire capital structure paid out all the investors in cash and then had the upside for those that were below the line of demarcation of value.
They participated in the equity of the company and then probably the most dramatic but there are a couple of other is would be the nagra Mohawk situation, where we initiated the restructuring with the management team there and in 1996 that culminated in.
Buying out $10 billion worth of independent power contracts Recapitalizing, the company selling their generation assets and culminated in an M&A transaction that national grid bought the company for three times, what the price of the stock was when we took the assignment and once again that was another circumstance, where we took our.
Banking free feed stock appreciation rights have been down that path of incentive before and then.
At T X you we were brought in at DLJ merchant banking, that's and I joined the board of PX you. After we made a $750 million investment to create liquidity for the company after having bankrupted their UK operations back then and that was in 2002, and then I chair.
Third the special Committee in 2007 that that resulted in the sale of that company in a going private transaction to KKR TPG and Goldman Sachs and.
And then on as much smaller scale that the wind business that we owned a catamount energy resulted in the sale to do.
In 2008, and then we just add that Diamond Castle.
Just sold the.
The operations of KBC solar that we started from scratch.
And so I've been down this path before and just to ILLUMENATE.
The role I'm playing.
Because I think that the compensation structure that Sam offered and I buy willingly accepted I've been down this path before is I'm going to have a salary of a dollar a year and.
A million options, so Mike my compensations completely contingent upon our ability to execute on the strategic review results and to generate shareholder value.
Great and then and then just one more for you Mike.
Another view is indefinite obviously, we're going to get Investor calls about I guess, what we think our timing is for how this could play out and I know you don't want to obviously back yourself into a corner.
The timeline, but maybe you could give us a sense for how long do you expect to sit in the CEO seat or are you are guiding for for the foreseeable future or if and when somebody else does still into the CEO role I guess, what would you guys look for in the next CEO, whether it be experience or.
Types of quality of management.
Just any color there would be super helpful. Well, clearly that that would be contingent upon what the company looks like after executing on the strategic review and I'm just going to be around until that's done. So you know.
That I think that's a completely different I mean, you just just imagine what the various outcomes could be if the if your exclusively a UK company at that point in time of your exclusively in North American business or you sold one of the components of the business already you'd be looking for the skill set that was required depending upon the outcome of the X.
Houston and what assets are need to be managed in what the company looks like then.
Thank you and if I could just squeeze in just one more just kind of take advantage of the fact that we do have Sam on the phone today and obviously.
She is in a huge investor focus right now is becoming a much more of a of a folk.
Focus for for for long term investors as well and then actually does a great job with getting the message across of how Covanta is positioned but same I'd love to get your take on just that the topic in general and then how you see covanta playing a role in not only the admissions a portion of.
The the equation, but but I guess in other areas and how they can go back to a plays in there.
Wow you know, yes, she has become a very important analysis points for every investor in every investment.
The fact that we're in the waste to energy business.
Really means we're in land fill closing business.
And you know there are a lot of that you know.
Great short so you can follow along.
I can't imagine one has good I mean, he has she point of view as we're trying to close all of America's landfills.
And that and that's exactly what's what's driving our business in Europe. So I think you know that in the fact that we haven't been very good track record of eliminating dyax and do in making it's pretty clean so when not drink President Obama has.
Yes.
From a in the beginning and they were working on a eight program too.
Correct Josh.
Not cleaner, Iran.
Generation.
Wasting energy was classified as a positive not a negative and that's really what we are going forward.
Great. Thank you so much.
Okay.
Once again, if you would like to ask a question. Please press star and then one easing a touchtone telephone.
To address all your questions you May press star into.
Our next question comes from Brian Lee from Goldman Sachs. Please go with your question.
Hey, everyone. Good morning, Thanks for taking the questions and maybe for Mike just to start off on the.
The strategic review here at a high level can you speak to sort of capital allocation, how how it fits into the priorities you know just how you're thinking about maybe goes capex dividends do they remain a staple here.
Could those be adjusted further and then also maybe some thoughts around de levering just what are sort of the priority is going to be.
Across some of those key buckets.
So let me Sam I'll take that the this is Mike the.
The question is a good one because once again if if for example, you were able to.
To realize on the sale of a component of the business at a.
Multiple differential from where the company presently trades and have cash on hand at that point, you would use that as a way to rationalize your capital structure and do you deal with it at that point in time I don't think that this is by definition a.
Balance sheet restructuring in that regard, but but it will it will give the company options. It presently doesn't have it if there was cash on hand and were able to.
Maintain EBITDA at levels that should generate shareholder value enhancement on the on the question of.
Of capital allocation, though so when you.
That's what the that's what that that's what the portfolio optimization is really all about when you think about it is are we allocating capital to to keep plants running that are producing profitability that warrants that capital investment. So thats one of the first things that were going to be looking at is are are we maintaining a portion of our.
Our fleet that aging in a way that is it capital destroying because we're investing more than what the profitability opportunities are so I think that that will be.
The core because that's where 85% of our EBITDA comes from that's going to be the core of what this.
Early stage review will be is to rationalize the allocation of that capital to maintain those operations. So hopefully that will result in making some pretty tough decisions about.
What assets to focus on and work with what assets will take us to the future.
Okay. That's great appreciate that context, and then you know sort of.
A segue to the second question I had but you mentioned Sam during some of the Q, an 80 20 rule and that's consistent with.
What Mike just sort of laid out as well.
The management team had been doing some minor tweaking of the portfolio here and there in the U.S. today, but it sounds like this is just going to be a much more wholesale maybe shrink to grow type of strategy is that is that the fair characterization and then secondly, there has also been to some discussion, especially in recent calls that.
You know maybe not in the immediate term, but in the medium term and long term that the U.S. can be a source of growth for us.
W.W.P. plants again is that strategy sort of off the table or is that is that thought process changing here as part of this strategic review. Thank you.
No that thought process has not changed at all and.
Stead of shrink to greatness I would I would say would be to reallocate priorities to greatness would be a better way to think about it in that regard.
Because just because if we ever were valued on the number of plants that we own and operate.
That but that's not that's not a value measure so it's going to be what those what those manufacturing facilities that prove that take the ways to produce electricity what they can do what they can provide to the portfolio and do they warrant the continued fueling of of more capital into them.
Okay. Thanks, I'll pass it on.
Thank you.
And ladies and gentlemen at this time Im showing no additional questions I'd like to turn the conference call back over to Mike Ranger for any closing remarks.
Great. Thanks, very much well, we're obviously, we're very excited about this new chapter in this inflection point in Covantas history, and really look forward to.
Rolling our sleeves up and getting involved in taking a completely new look at the business and scrub it down to is as as to its bare bones and figure out what makes the most sense and clearly once again. This is all about online.
Unlocking value for shareholders and that will be our guiding principle in this process. So with that thank you very much for your time and attention and your support of Covanta. Thank you.
And ladies and gentlemen, the conference has now concluded we do thank you for attending today's presentation you.
You may now disconnect your lines.