Covanta Buys GE's Delaware Facility - Analyst Blog

By Zacks | December 06, 2012 AAA

Covanta Holding Corporation (CVA) has acquired Delaware Valley Resource Recovery Facility from GE Energy Financial Services ("GE EFS"), a subsidiary of General Electric Company (GE) for $94 million in cash.

Located in Chester, Pennsylvania, the Delaware Valley facility is operated by Covanta. Pre-acquisition, the facility was previously leased from GE EFS. The facility provides sustainable waste management services to Delaware County, PA and surrounding communities and posses a processing capacity of approximately 2,700 tons per day.

Per the terms of the deal, the transaction includes acquisition of approximately $122 million cash collateral trust and the assumption of $64 million in facility project debt principal. The cash from the collateral trust will be shown as restricted cash on the Covanta's balance sheet. The company plans to utilize the cash to service project debt and to make cash distributions to the company through 2019.

The transaction is immediately accretive to Covanta's adjusted earnings before interest tax, depreciation and amortization ("EBITDA"), free cash Flow, and adjusted earnings per share.

Covanta funded the transaction with the cash in hand and liquidity under its revolving credit facility. At the end of third quarter of 2012, cash and cash equivalents were $262 million, up from $195 million at the end of third quarter of 2011.

Covanta based in Morristown, New Jersey was one of the Sandy Superstorm victims. Therefore, post Sandy the company revised its guidance in November 2012. It expects revenue to decline and expenses related to repair and restart to surge due to the disruption caused by the hurricane. It expects adjusted EBITDA to be in the range of $490 million to $500 million versus its previous range of $500 million to $515 million. It expects adjusted earnings per share to be in the range of 50 cents to 55 cents per share versus its prior expectation of 55 cents to 60 cents per share. However, it re-affirmed its free cash flow guidance in the range of $250 million to $265 million.

The transaction will lead Covanta Holding to become the sole owner of the facility and have control of a well-run facility in an attractive location. Therefore, it will be able to receive the benefit of ownership. Consequently, this will bring in new opportunities for the company and will build up client relationship with the Delaware County Solid Waste Authority.

With this acquisition, the company continues to grow the value of the existing portfolio and seems to be allocating its capital efficiently. However, currently, the adverse impact of hurricane Sandy and weakness in economy are matters of concern. The company presently retains a short-term Zacks #3 Rank (Hold).

Covanta Holding Corporation is an internationally recognized owner and operator of large-scale Energy-from-Waste and renewable energy projects. The company's 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 and renewable energy.

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