Waste Business Journal

Covanta Q4 Profit Improves on 14% Jump in Revenue

Date: February 9, 2011

Source: Covanta Holding Corp.

Covanta Reports 2010 Full Year and Fourth Quarter Results

Covanta Holding Corporation (NYSE: CVA) ("Covanta" or the "Company") reported unaudited financial results today for the three and twelve months ended December 31, 2010.

Commenting on the year just completed, Anthony Orlando, President and CEO stated, "I'm pleased with our overall performance in 2010, particularly Free Cash Flow generation, which not only exceeded guidance but established a new company record. Covanta's team accomplished this by maintaining boiler availability above 91%, successfully integrating the EfW businesses acquired from Veolia ("the Veolia acquisition") and exercising good working capital management. We also followed through on our commitment to return excess capital to shareholders by returning $328 million and to proactively manage our balance sheet by issuing new 10-year senior notes to refinance our 1.00% senior convertible debentures."

Assets Held for Sale

During the fourth quarter of 2010, our interests in non-core legacy IPP assets located in India, Bangladesh and the Philippines were classified as Assets Held for Sale as a result of our ongoing effort to sell them. Consequently, all corresponding prior year periods have been reclassified to reflect those assets as discontinued operations. Please note that all results presented in the balance of this press release reflect only the results of continuing operations, unless otherwise noted.

Full Year 2010 Results - From Continuing Operations

For the twelve months ended December 31, 2010, total operating revenues increased 14% to $1.6 billion from $1.4 billion in 2009.

Increased revenues due to the Veolia acquisition, higher metals revenues and higher construction revenues were partially offset by the impact of contract transitions, further weakness in power pricing and continued softness in spot waste disposal pricing.

Operating expenses of $1.4 billion, rose 17% from $1.2 billion. The increase was primarily attributable to the Veolia acquisition and higher construction expenses as well as the non-cash write-down of certain assets.

Adjusted EBITDA was $470 million in 2010 compared to $454 million in 2009. This $16 million, or 4% increase was primarily due to the Veolia acquisition, higher metals revenues and improved performance at recently acquired facilities, partially offset by the impact of the contract transitions and weakness in power pricing and continued softness in spot waste disposal pricing.

For the year, Free Cash Flow was $318 million, an increase of 6% over the $300 million generated in 2009. Strong operating performance and the Veolia acquisition were key contributors to this growth, along with a positive $21 million working capital change. The working capital change is expected to largely reverse during 2011 and 2012.

Diluted earnings per share ("EPS"), excluding special items, was $0.42 compared to $0.40 in 2009. GAAP EPS was $0.19 compared to $0.39 in 2009.

During 2010, we utilized Free Cash Flow and cash on hand to: return $328 million to shareholders; invest $130 million to complete the Veolia acquisition; and pay down $177 million of debt. We ended the year with a strong balance sheet and ample liquidity. As of December 31, 2010, unrestricted cash was $126 million, restricted cash was $233 million (of which $157 million is designated for future project debt principal repayment), and our $300 million revolving credit facility was undrawn and fully available.

Fourth Quarter Results - From Continuing Operations

For the three months ended December 31, 2010, consolidated operating revenues increased $51 million or 14% to $419 million, up from $368 million in the prior year comparative period. Revenues associated with the Veolia acquisition and higher construction revenues were the main drivers, with higher metals revenues and service fee contract escalations also contributing to the increase. Collectively, these increases were partially offset by lower tip fee and lower power pricing as well as by lower power production due to unprofitable biomass operations being suspended. We refer to this biomass operation suspension as economic dispatch.

Operating expenses of $356 million rose 13% from $315 million. The increase, which was primarily attributable to the Veolia acquisition and higher construction related expenses, was partially offset by receipt of a full year of alternative fuel tax credits and the economic dispatching of certain biomass facilities.

Adjusted EBITDA was $129 million, up $3 million or 2% compared to last year's fourth quarter, primarily due to higher recycled metal prices, the benefit of the Veolia acquisition and increased alternative fuel tax credits. We recorded a full year of these credits in the fourth quarter because the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which passed at the end of the year, provided for the retroactive application of those credits from January 1, 2010 as well as their extension through 2011.

Free Cash Flow was $82 million in the fourth quarter, compared to $120 million in the prior year comparative period, with the reduction primarily attributable to the reversal of favorable working capital changes realized earlier in the year.

Our EPS, excluding special items, was $0.20 for the fourth quarter of 2010 compared to $0.10 in the prior year quarter, with the increase attributable to the growth in our operating income as well as the impact of a lower effective tax rate. The special items for the quarter totaling $16 million, pre-tax, relate primarily to a loss incurred on the extinguishment of debt in connection with the tender offer for the 1.00% Senior Convertible Debentures completed in December 2010. On a reported basis, GAAP EPS was $0.13, which compares to EPS of $0.11 in the prior year quarter.

During the quarter, Covanta repurchased $58 million in common stock, or 3.6 million shares (2.4% of our outstanding shares), at a weighted average cost of $16.16 per share, bringing the total amount of stock repurchased in 2010 to $95 million (6.1 million shares) and the total amount of capital returned to shareholders to $328 million.

2011 Guidance

The Company is establishing guidance for 2011 for the following key metrics (in millions, except per share amounts):

(1) We will utilize Adjusted EPS as one of our 2011 guidance metrics. The difference between this metric and EPS, Excluding Special Items are adjustments to exclude the net impact of the changes in fair value of the conversion feature in our cash convertible notes and the related hedges and transaction-related costs. There was no net EPS impact for these items for the year ended December 31, 2010.

Commenting on the Company's 2011 guidance, Mr. Orlando noted that, "I am pleased that at the mid-point of our guidance, we're targeting about 5% Adjusted EBITDA growth with continued strong free cash flow. I am confident in our team's ability to accomplish this by improving recently acquired facilities, effectively managing our assets, controlling costs and being more focused with our development efforts. We are also renewing our commitment to continue returning surplus capital to shareholders in a prudent and timely manner and to fund high value development projects as they come to fruition."

Conference Call Information

Covanta will host a conference call at 8:30 am (Eastern) on Thursday, February 10, 2011 to discuss its results for the three and twelve months ended December 31, 2010. To participate, please dial 877-806-3982 approximately 10 minutes prior to the scheduled start of the call. If you are calling from outside of the United States, please dial 702-928-7062. Please utilize conference ID number 37581766 when prompted by the conference call operator. We will also be referring to supplemental slides and webcasting the conference call, either of which can be accessed from the Investor Relations section of the Covanta website at www.covantaenergy.com.

A replay of the conference call will be available from 11:30 am (Eastern) Thursday, February 10, 2011. To access the replay, please dial 800-642-1687, or from outside of the United States 706-645-9291 and use the replay conference ID number 37581766. The webcast will also be archived on www.covantaenergy.com.

About Covanta

Covanta Energy Corporation is an internationally recognized owner and operator of large-scale Energy-from-Waste and renewable energy projects and a recipient of the Energy Innovator Award from the U.S. Department of Energy's Office of Energy Efficiency and Renewable Energy. Covanta's 44 Energy-from-Waste facilities provide communities with an environmentally sound solution to their solid waste disposal needs by using that municipal solid waste to generate clean, renewable energy. Annually, Covanta's modern Energy-from-Waste facilities safely and securely convert approximately 20 million tons of waste into 9 million megawatt hours of clean renewable electricity and more than 9 billion pounds of steam that are sold to a variety of industries. For more information, visit www.covantaenergy.com.

Cautionary Note Regarding Forward-Looking Statements

Certain statements in this press release may constitute "forward-looking" statements as defined in Section 27A of the Securities Act of 1933 (the "Securities Act"), Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), the Private Securities Litigation Reform Act of 1995 (the "PSLRA") or in releases made by the Securities and Exchange Commission ("SEC"), all as may be amended from time to time. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of Covanta and its subsidiaries, or general industry or broader economic performance in global markets in which Covanta operates or competes, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Statements that are not historical fact are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as the words "plan," "believe," "expect," "anticipate," "intend," "estimate," "project," "may," "will," "would," "could," "should," "seeks," or "scheduled to," or other similar words, or the negative of these terms or other variations of these terms or comparable language, or by discussion of strategy or intentions. These cautionary statements are being made pursuant to the Securities Act, the Exchange Act and the PSLRA with the intention of obtaining the benefits of the "safe harbor" provisions of such laws. Covanta cautions investors that any forward-looking statements made by Covanta are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements with respect to Covanta, include, but are not limited to, the risk that Covanta may not successfully close its announced or planned acquisitions or projects in development and those factors, risks and uncertainties that are described in periodic securities filings by Covanta with the SEC. Although Covanta believes that its plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, actual results could differ materially from a projection or assumption in any forward-looking statements. Covanta's future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The forward-looking statements contained in this press release are made only as of the date hereof and Covanta does not have or undertake any obligation to update or revise any forward-looking statements whether as a result of new information, subsequent events or otherwise, unless otherwise required by law.

Discussion of Non-GAAP Financial Measures

We use a number of different financial measures, both United States generally accepted accounting principles ("GAAP") and non-GAAP, in assessing the overall performance of our business. To supplement our assessment of 2010 results prepared in accordance with GAAP, we use the measures of Adjusted EBITDA, Free Cash Flow, and Diluted Earnings Per Share, Excluding Special Items, which are non-GAAP measures as defined by the Securities and Exchange Commission. To supplement our assessment of 2011 results, we have determined that we will use Adjusted EBITDA, Free Cash Flow, and Adjusted EPS, and no longer use Diluted Earnings Per Share, Excluding Special Items. This press release described the differences between Diluted Earnings Per Share, Excluding Special Items and Adjusted EPS. The non-GAAP financial measures of Adjusted EBITDA, Free Cash Flow, Diluted Earnings Per Share, Excluding Special Items, and Adjusted EPS as described below, and used in the tables above, are not intended as a substitute or as an alternative to net income, cash flow provided by operating activities or diluted earnings per share as indicators of our performance or liquidity or any other measures of performance or liquidity derived in accordance with GAAP. In addition, our non-GAAP financial measures may be different from non-GAAP measures used by other companies, limiting their usefulness for comparison purposes.

The presentations of Adjusted EBITDA, Free Cash Flow, Diluted Earnings Per Share, Excluding Special Items and Adjusted EPS are intended to enhance the usefulness of our financial information by providing measures which management internally use to assess and evaluate the overall performance of its business and those of possible acquisition candidates, and highlight trends in the overall business.

Adjusted EBITDA

We use Adjusted EBITDA to provide further information that is useful to an understanding of the financial covenants contained in the credit facilities of our most significant subsidiary, Covanta Energy, through which we conduct our core waste and energy services business, and as additional ways of viewing aspects of its operations that, when viewed with the GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete understanding of our core business. The calculation of Adjusted EBITDA is based on the definition in Covanta Energy's credit facilities, which we have guaranteed. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, as adjusted for additional items subtracted from or added to net income. Because our business is substantially comprised of that of Covanta Energy, our financial performance is substantially similar to that of Covanta Energy. For this reason, and in order to avoid use of multiple financial measures which are not all from the same entity, the calculation of Adjusted EBITDA and other financial measures presented herein are ours, measured on a consolidated basis.

Under these credit facilities, Covanta Energy is required to satisfy certain financial covenants, including certain ratios of which Adjusted EBITDA is an important component. Compliance with such financial covenants is expected to be the principal limiting factor which will affect our ability to engage in a broad range of activities in furtherance of our business, including making certain investments, acquiring businesses and incurring additional debt. Covanta Energy was in compliance with these covenants as of December 31, 2010. Failure to comply with such financial covenants could result in a default under these credit facilities, which default would have a material adverse affect on our financial condition and liquidity.

These financial covenants are measured on a trailing four quarter period basis and the material covenants are as follows:

• maximum Covanta Energy leverage ratio of 3.50 to 1.00, which measures Covanta Energy's Consolidated Adjusted Debt (which is the principal amount of its consolidated debt less certain restricted funds dedicated to repayment of project debt principal and construction costs) to its Adjusted EBITDA (which for purposes of calculating the leverage ratio and interest coverage ratio, is adjusted on a pro forma basis for acquisitions and dispositions made during the relevant period); and

• minimum Covanta Energy interest coverage ratio of 3.00 to 1.00, which measures Covanta Energy's Adjusted EBITDA to its consolidated interest expense plus certain interest expense of ours, to the extent paid by Covanta Energy.

In order to provide a meaningful basis for comparison, we are providing information with respect to our Adjusted EBITDA for the three and twelve months ended December 31, 2010 and 2009, reconciled for each such periods to net income and cash flow provided by operating activities, which are believed to be the most directly comparable measures under GAAP.

Free Cash Flow

Free Cash Flow is defined as cash flow provided by operating activities less maintenance capital expenditures, which are capital expenditures primarily to maintain our existing facilities. We use the non-GAAP measure of Free Cash Flow as a criterion of liquidity and performance-based components of employee compensation. We use Free Cash Flow as a measure of liquidity to determine amounts we can reinvest in our core businesses, such as amounts available to make acquisitions, invest in construction of new projects or make principal payments on debt.

In order to provide a meaningful basis for comparison, we are providing information with respect to our Free Cash Flow for the three and twelve months ended December 31, 2010 and 2009, reconciled for each such periods to cash flow provided by operating activities, which we believe to be the most directly comparable measure under GAAP.

Diluted Earnings Per Share, Excluding Special Items

Diluted Earnings Per Share, Excluding Special Items excludes certain income and expense items that are not representative of our ongoing business and operations, which are included in the calculation of Diluted Earnings Per Share in accordance with GAAP. The following items are not all-inclusive, but are examples of items that would be included as Special Items in prior comparative and future periods. They would include write-down of assets, significant gains or losses from the disposition of businesses, gains or losses on the extinguishment of debt and other significant items that would not be representative of our ongoing business.

We use the non-GAAP measure of Diluted Earnings Per Share, Excluding Special Items to enhance the usefulness of our financial information by providing a measure which management internally uses to assess and evaluate the overall performance and highlight trends in the ongoing business.

In order to provide a meaningful basis for comparison, we are providing information with respect to our Diluted Earnings Per Share, Excluding Special Items for the three and twelve months ended December 31, 2010 and 2009, reconciled for each such period to diluted earnings per share, which is believed to be the most directly comparable measures under GAAP.

Adjusted EPS

Adjusted EPS excludes certain income and expense items that are not representative of our ongoing business and operations, which are included in the calculation of Diluted Earnings Per Share in accordance with GAAP. The following items are not all-inclusive, but are examples of reconciling items in prior comparative and future periods. They would include write-down of assets, the effect of derivative instruments not designated as hedging instruments, significant gains or losses from the disposition of businesses, income and loss on the disposal of discontinued operations, transaction-related costs, income and loss on the extinguishment of debt and other significant items that would not be representative of our ongoing business.

We will use the non-GAAP measure of Adjusted EPS to enhance the usefulness of our financial information by providing a measure which management internally uses to assess and evaluate the overall performance and highlight trends in the ongoing business.