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Covanta Energy 2016

2016 was a year of substantial progress in positioning Covanta for long-term growth

Covanta is one of the world’s largest owners and operators of infrastructure for the conversion of waste to energy (known as EfW or “energy-from-waste”). The company owns and operates related waste transport and disposal and other renewable energy production businesses. 
The EfW facilities earn revenue from both the disposal of waste and the generation of electricity and steam as well as from the sale of metal recovered during the EfW process. Covanta processes approximately 20 million tons of solid waste annually and owns 42 energy-from-waste facilities and 5 additional energy generation facilities, including other renewable energy production facilities (wood biomass and hydroelectric), which are primarily located in North America (United States and Canada).These energy production facilities produce approximately 10 million megawatt hours of electricity annually. Covanta also operates a waste management infrastructure which is complementary to its core EfW business. The Company delivers waste and energy services primarily in the United States and Canada, and is currently constructing an EfW facility in Dublin (Ireland), which will be owned and operated by Covanta on completion. The Company holds interests in an EfW facility in Italy and an EfW infrastructure business in China. 
According to the Annual Financial Report in 2016, Covanta generated 78% of waste and service revenue in the North America segment in 2016 under contracts at set rates and 22% at market prices. Covanta´s waste service and energy contracts expire between 2017 and 2038 which means that the Company will have greater market risks in maintaining and enhancing revenue. 
In 2016, total revenue of the Company increased by $54 million (+ 3.2%) to $1,699 million from $1,645 million in 2015. Overall, higher waste and service revenue compensated a decline in energy revenue. Waste and service revenue grew by $83 million (+ 7.5%) to $1,187 million from $1,104 million in 2015, including EfW waste processing of $26 million or 2.8%, environmental services revenue of $12 million and higher municipal services revenue, primarily relating to the New York City MTS [1]  contracts and transfer station.
Energy revenue decreased by $51 million (- 12.1%) from $421 million to $370 million in 2015, driven by a $66 million decline from transactions, including $36 million related to economically dispatching biomass facilities, $29 million resulting from the exchange of the ownership interest in a facility in China and $5 million from lower production at EfW facilities related to turbine generator downtime at Covanta´s Plymouth facility. These declines were partially compensated by higher revenue from waste and service contract transitions.
The revenue from recycled metals decreased by $1 million, driven by lower market prices and other revenue increased by $21 million due to higher construction revenue. 
The operating expense increased by $54 million (+ 3.51%) to $1,590 million from $1,536 million in 2015. The year-on-year increase was primarily due to the store plant maintenance and higher employee incentive compensation. Plant operating expenses increased by $48 million in 2016, driven primarily by higher incentive compensation expense of $24 million and by an increase in EfW plant maintenance expense of $17 million.
Adjusted EBITDA declined by $18 million (- 4.2%) on a year-on-year basis to $410 million from $428 million in 2015, primarily due to a decline in Covanta´s energy sector. 
As Covanta´s waste disposal & waste service, as well as energy contracts, expire at various times between 2017 and 2038, it will be difficult to maintain and enhance revenue in the future. For 2017 the Company projects contracted waste and service revenue to approximate levels of 2016. It also intends to seek replacement or additional contracts and to offer rates that will attract sufficient quantities of waste while providing acceptable revenue. 
The expiration of existing energy contracts will require Covanta to sell its output at prevailing rates or rates according to the terms of new contracts. However, Covanta expects that multi-year contracts for waste supply will continue to be available on acceptable terms in the marketplace.

Regarding Covanta´s two biomass facilities in California, whose revenue represented less than 1%, 3% and 4% of the total Company´s revenue in each of the years 2016, 2015, and 2014, respectively, and which are currently in economic dispatch, the Company hopes that if market conditions improve, it may restart one or both these facilities.

[1] New York City MTS are Marine Transfer Stations in New York City which ship containerized waste via barges from New York to rail connections for long-distance export