Covanta Holding Corporation
Q1 2018 Earnings Call Transcript

Published: 27 Apr 2018

[Operator:]

Good morning, everyone, and welcome to the Covanta Holding Corporation's First Quarter 2018 Financial Results Conference Call and Webcast. An archived webcast will be available two hours after the end of the conference call and can be accessed through the Investor Relations section of the Covanta website at www.covanta.com. The transcript will also be archived on the company's website. At this time, for opening remarks and introductions, I'd like to turn the call over to Dan Mannes, Covanta's Vice President of Investor Relations. Please go ahead.

[Daniel Mannes:]

Thank you, and good morning. Welcome to Covanta's First Quarter 2018 Conference Call. Joining me on the call today will be Steve Jones, our President and CEO; and Brad Helgeson, our CFO. We'll provide an operational and business update, review our financial results and then take your questions. During their prepared remarks, Steve and Brad will be referencing certain slides we prepared to supplement the audio portion of this call. Those slides can be accessed now or after the call on the Investor Relations section of the website, www.covanta.com. These prepared remarks should be listened to in conjunction to with these slides. Now on to 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 company's 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, which is April 27, 2018. 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 U.S. GAAP, they should not be considered in isolation from our financial statements, which had been presented in accordance with GAAP. For more information regarding definitions of our non-GAAP measures and how we use them as well as limitations as to their usefulness for comparative purposes, please see our press release, which was issued last night and was furnished to the SEC on Form 8-K. With that, I'd like to turn the call over to our President and CEO, Steve Jones. Steve?

[Stephen Jones:]

Thanks, Dan. Good morning, everyone. For those of you using the web deck, please turn to Slide 3. I'll provide a brief overview of the financial results, along with an update on some of our strategic initiatives, then I'll go through more color on the key drivers that impacted quarter. We started the year off strong with $100 million of adjusted EBITDA. Our free cash flow before working capital was improved versus last year and along with our working capital usage was in line with our expectations. These results position us well to meet our full year guidance on all of our metrics, which we are affirming today. During the first quarter, our fleet showed improved performance compared to the first quarter of 2017. As many of you will recall, during Q1 2017, we had significant unplanned downtime at 3 plants. One of which was Fairfax, which weighed on our performance throughout the quarter and increased operating costs. This year, we experienced more normal performance without the material unplanned downtime that was incurred in 2017. The Fairfax County facility in Virginia restarted in late December after nearly a full year of downtime due to fire. Investments we made prior to that event are paying off and the plant is now running at record levels. In the first quarter, the plant processed more waste than it had in any prior first quarter, while achieving the highest quarterly power generation in its history. I'm very proud of our recovery as we work closely with the client, local community and insurers with significant efforts by all parties to get to this point. The plant is now meeting the expectations we set out a couple of years ago, and this performance is a key component of the improvement of this quarter and in our full year guidance. Another positive news. The New York City Department of Sanitation issued a notice to proceed for the 91st Street Marine Transfer Station, or MTS, in Manhattan. This is the second of 2 MTS's, where we have a 20-year waste disposal contract. We already receive 475,000 tons annually from the North Shore MTS in Queens. And we expect that when fully ramped, we'll take about 175,000 tons from 91st Street. Over the next year, we will procure and install the infrastructure to support the start-up and the facility, which is scheduled for March 2019. We're providing New York City with sustainable waste solutions for many years and look forward to this expanded opportunity to provide these critical services. Lastly, as we discussed on our fourth quarter call, we closed on the Dublin transaction with the Green Investment Group, or GIG for short, on February 12, 2018. The $167 million in cash received was used to reduce leverage, which Brad will review during his presentation. From a business standpoint, we continue to operate the Dublin plant and it is performing at a very high level. Our development efforts with GIG in U.K. are progressing. The Rookery plant has received its operating permit. And we understand through social media that a local group may file a claim challenging the permit. The U.K. Environment Agency will aggressively defend its decision to grant the permit. And given the environment agency's rigorous permitting process, we expect that the claim will fail. Along with our partners, we will continue project development without interruption, and we'll assess what effect, if any, this claim may have on our project financing schedule. At the same time, we continue to work with our partners through key development steps on the Protos, Newhurst and GIG projects, including waste agreements, EPC negotiations and permitting. Several of these projects are targeted to move into full construction by the end of next year. Now I'll get into the detail on our markets and operations. I'll start with the waste business. Please turn to Slide 4. Waste and service revenue was a strong contributor to the first quarter as we realized 6% same-store volume growth, primarily due to a full quarter of operations at Fairfax. Outside of Fairfax, the balance of our fleet also performed better year-on-year with less downtime, and we expect strong year-over-year volumes throughout 2018. Same-store pricing improved by 2% due to contractual escalators, contract repricing and improved spot prices. Dublin added $13 million of revenue in the quarter as it processed nearly 160,000 tons of waste and continues to perform very well. As all of you know, profiled waste is a key growth opportunity, and we believe our plants offer a unique and preferred solution for many forms of commericial and industrial waste. Our Covanta Environmental Solutions business drove 1% growth in profiled waste revenue at our Energy-from-Waste facilities while achieving 10% revenue growth in our material treatment disposal and recycling service lines. We expect to see continued expansion of this business over the course of the year as we increase utilization of existing sites and complete projects designed to help process more volume in the Covanta network. So let me highlight 2 examples of this progress. First, we completed construction of a material processing facility, or MPF, for profiled waste near our existing Indianapolis Energy-from-Waste plant. This is a key addition to our portfolio as it explains our capability to manage and treat different types of industrial and commercial waste by improving logistics and ultimately increasing the total volumes of both solid and liquid profiled waste that we can accept. Second, we made strides to enable further growth of our health care solutions capabilities. A business focused on offering superior secure destruction services for expired and unused pharmaceuticals and providing disposal for regulated medical waste that can be landfilled as it requires thermal treatment. In order to enhance these capabilities, we received a permit to process regulated medical waste at a third plant in our EfW fleet. The pricing for this type of waste is significantly higher than MSW. And we're focused on replacing MSW with this higher-priced waste. Over time, we hope to add this disposal capability at incremental EfW facilities as well. We're separately focused on expanding our efforts to take on more expired and unused pharmaceutical waste. In order to provide a broader solution for this growing market, we're expanding our DEA licensed sites, which allows us to increase the revenues from this line of business. Our goal is to be the preferred provider of disposal services to companies that collect these materials. We remain confident our full year profiled waste revenue will approach double-digit growth year-over-year, and this will be a key driver of our overall same-store pricing growing by at least 3%. Now let's move on to energy. Please turn to Slide 5. First quarter energy revenue increased a solid 16%, including nearly 10% same-store improvement. Similar to waste, the biggest driver was improved volumes given the full quarter impact of Fairfax. Same-store pricing also increased 3% in Q1 as we benefited from colder weather, which had a positive impact on market pricing. The improved power prices in the first quarter were welcome, but were not accompanied by better forward prices. So the full year expectation for power prices and revenue is unchanged. The operations at Dublin kicked in another $5 million in revenue during the quarter. However, going forward, we will not receive power revenues from Dublin under the O&M agreement, but we will still participate in the plant performance through our 50% ownership. Lastly, we continue to prudently reduce risk in line with our historical policies. For 2018, we retained nearly 1.5 million megawatt hours of open exposure, which represents less than 25% of total expected generation. At the same time, we are actively reducing our market position in 2019 and 2020. Let's move on to the metals business on Slide 6. And what has been a common theme this quarter, we also saw year-over-year gains in metals with improvements in both price and volume. On the first side, first quarter same-store realized prices increased by 12%, driven primarily by an 18% increase in the HMS index year-over-year. With improved plant performance, in particular at Fairfax, we also saw recovered volumes grow by 7% while quarterly sales volumes increased year-over-year as we did not build inventory the way we did in 2017. For the full year, we still expect year-over-year growth in tons recovered and in tons sold. Ferrous pricing remains firm with the HMS #1 Index averaging $321 per ton in the first quarter. Pricing has further improved in April with HMS setting at $353 per ton. Domestic mill utilization is high amid solid demand, and we believe the initial impacts of the Section 232 tariffs are positive. In light of the strong pricing year-to-date, there was some caution on the long-term outlook. We have modestly increased our full year range from HMS -- for HMS to $250 to $300 per ton. We had a similar positive story on the nonferrous side with same-store pricing nearly doubling year-over-year, given the impact of our nonferrous processing facility in Pennsylvania, which started in the second quarter of 2017. Nonferrous recovery improved by over 20% due to both greater plant throughput and an increased nonferrous recovery equipment. Steel volumes fell by 40% giving -- given the reduced salable volumes left after processing. As we discussed in the past, the pricing benefit of processing far outweighs the volume reduction. To close out this discussion on metals, I wanted to touch on the current and potential impacts of tariffs and trade on our business. As most of you know, the U.S. imposed Section 232 tariffs of 25% and 10%, respectively, on imports of steel and aluminum. The immediate result of this tariffs was to drive increase domestic production of these products and by association, increase demand for imports like scrap ferrous and nonferrous. The results of these actions are visible in the improved prices for steel, aluminum and copper. While the initial impact of these developments has been positive, we have seen and could see more retaliatory activity out in China and other countries, which could reduce demand for some of our metals products. We will carefully monitor markets as the year progresses. Let's now move on to maintenance and operating expense. Please turn to Slide 7. Total Energy-from-Waste maintenance spend for the quarter, including both expense and CapEx, was $133 million versus $122 million last year. We have now completed 33% of our expected full year Energy-from-Waste maintenance spend. And given our experience to date, we are -- we remain comfortable with our full year range of $390 million to $410 million. I would note that while our total number for the quarter is higher than last year, the mix is materially different. On the expense side, we're lower this year due to timing as we have a bit more of maintain expense planned for Q2 than we did in 2017 and also due to reduced unplanned outages, which tend to carry higher costs. On the CapEx side, we did have an increase in Q1, but that was in line with our full year expectations. Outside of maintenance, other plant operating expenses increased 9% year-over-year. The biggest driver of this increase at our Energy-from-Waste operations was Dublin. Non-Energy-from-Waste operating expenses were driven by growth in the Covanta Environmental Solutions platform and the impact of the nonferrous processing facility. As we look out to the balance of the year, I expect Energy-from-Waste costs to migrate higher, primarily due to the inclusion of Dublin, while non-Energy-from-Waste operating costs should see less growth as we pass the start-up of the anniversary of the nonferrous processing plant in Pennsylvania. Lastly, as an update on insurance, we received $7 million in business interruption proceeds during the quarter, and we expect another $5 million in the second half of the year. One last note. I'm very pleased with our results in Q1. We had a very successful quarter. It sets us up nicely for the full year. I want to thank our employees for the hard work and focus related to sourcing waste, undertaking outages and operating our facilities, all done in a safe and reliable manner. We are committed to continuing this performance as we move through this fiscal year. With that, I'll turn the call over to Brad to discuss the quarterly results in greater detail.

[Bradford Helgeson:]

Thanks, Steve, and good morning, everyone. I'll begin my review of our first quarter financial performance with revenue on Slide 9. Total revenue was $458 million in the quarter, up $54 million over last year. Excluding commodity prices, we grew the top line by $28 million organically. As Steve discussed, we have strong performance across our fleet, particularly at Fairfax. Commodity prices provided a modest benefit with a more normal winter helping to drive $3 million of energy price improvement as compared to last year and higher scrap steel and nonferrous prices adding another $2 million. Dublin operations added $17 million of revenue in the quarter, which consisted of consolidated results of the project company filed closing our JV with Green Investment Group in February and service revenue earned under our O&M contract with the project after closing. This makes up the vast majority of the transactions category. For modeling purposes, you should expect the year-over-year revenue contributions from Dublin to be smaller in future quarters, in particular, the fourth quarter, as we anniversary a quarter of operations under 100% ownership last year. Lastly, long-term contract transitions were net $2 million tailwind in the quarter, resulting from better waste prices under new contracts and reduced client energy revenue sharing. Moving on to Slide 10. Adjusted EBITDA was $100 million in the first quarter, an increase of $49 million over Q1 in 2017. Adjusted EBITDA grew by $28 million on an organic same-store basis, with a full quarter of strong operations at Fairfax being the most significant driver contributing an additional $24 million year-over-year, inclusive of $6 million of business interruption insurance proceeds received in the quarter. Beyond Fairfax, we saw improved overall results across our fleet as we experienced significantly less unplanned downtime compared to last year. On the commodity front, in line with revenue growth, we saw $4 million of adjusted EBITDA benefit from improved energy and metals prices. Dublin operations contributed $13 million of adjusted EBITDA this quarter, again, reflecting a portion of the quarter with 100% ownership and the remainder at our 50% ownership through the JV. It's fair to expect that this year-over-year benefit will be lower in the second and third quarters given our 50% ownership going forward. And in the fourth quarter, we'll lap our 100% ownership from Q4 2017. Regardless, outside of Fairfax, Dublin is by far the largest driver of year-over-year adjusted EBITDA growth. Contract transitions represented a net positive $4 million in the first quarter. Bear in mind that we still expect transitions to be a net headwind for the full year, particularly in the third quarter as we recorded a benefit from the Hennepin County settlement last September in connection with our exit from that contract. Looking ahead to the second quarter, I'd note 2 more things as you refine your models. First, our second quarter maintenance activity should be fairly similar to Q1. This represents a slightly different sequential mix as compared to 2017 and reflects the maintenance plan that is more heavily first half weighted this year. Second, if you recall, we received significant Fairfax insurance recoveries in the second quarter last year, while this year we expect to receive the remainder of our insurance recoveries in the second half. Turning to Slide 11. Free cash flow was negative $52 million in the quarter, which reflected much of the working capital outflow that we anticipated this year. You should expect to see working capital movements normalize dramatically from here. Before working capital, free cash flow improved $14 million year-over-year in what is seasonally our weakest cash flow quarter. For the adjusted EBITDA $49 million higher, it's worth discussing some of the other factors that impacted cash flow during the quarter. First, based on our maintenance plan for this year, we anticipate a higher mix of maintenance CapEx versus maintenance P&L expense as compared to last year. This proved out in the first quarter as maintenance CapEx, including capital-type expenditures at client facilities, increased by $17 million. Again, this increase was in line with our expectations and our full year guidance. Second, with the Dublin plant moving to 50% ownership, we included our proportional share of adjusted EBITDA or only record cash flow to the extent of project dividend distributions, which this year are not expected until the fourth quarter. Lastly, we had a couple of unique items in the quarter. During the first 6 weeks of the year, all free cash flow at Dublin was contributed into restricted accounts under the project financing structure as was the case in the fourth quarter of 2017, which represented an $11 million headwinds to reported consolidated free cash flow. Also we incurred a combined $4 million of cash cost relating to the GIG transactions and severance, which are excluded from our definition of adjusted EBITDA. When looking past these ins and outs for the quarter, the real summary is that our strong operating performance has us squarely on track for full year guidance ranges for cash flow and as a company, we remain most focused on our target to hit $250 million of sustainable annual free cash flow by the middle of the next decade. Moving on to our growth investments, please turn to Slide 12. For 2018, we plan to invest around $20 million in organic growth projects, relating primarily to material processing facilities, or MPFs, in our CES business and increased metal recovery. That outlook is unchanged. Further, as Steve noted, we're now officially moving ahead with our preparations for the New York City 91st Street Marine Transfer Station. We expect to spend a total of around $35 million on transportation equipment with roughly $15 million this year and the balance in 2019. Most, if not all of this equipment, will be efficiently leased financed. In Dublin, we expect to spend a further $25 million for deferred final retainage-type payments to contractors following construction completion last year. This amount was fully accrued and cash funded as of year-end, so has no impact on our corporate cash and was included in our previously discussed total planned capital budget. So there is change there, it's just timing final payments. Lastly, to be clear, these expectations for growth investment exclude spending on our total ash processing project and Rookery as we await clarity on the timing of those investments. Please turn to Slide 13, where I'll conclude with an update on our balance sheet. At March 31, 2018, net debt was $2.4 billion, down $69 million from year-end 2017. This improvement relates primarily to the cash received from the GIG transaction, which we repatriated and used to repay revolver borrowings. The combination of this cash, along with our improved adjusted EBITDA resulted in our consolidated leverage ratio improving by nearly a full turn from last quarter to 5.6x. While we're certainly not yet where we want to be, we've made material stride since the third quarter of 2017, when our consolidated leverage peaked at 7.2x. Clearly, we're on the path of deleveraging that I've described for the past several quarters. On the senior credit facility covenant ratio, we ended the quarter at 3x, which provides us more-than-ample liquidity and flexibility. As a reminder, this covenant calculation excludes our $1.2 billion of holding company notes. Looking at the rest of the year, all else being equal, we anticipate remaining in this range on both leverage ratios. Pending the timing of investments and quarterly cash flows, we may even see leverage tick higher next quarter. However, our long-term plan remain to delever meaningfully further with our next target to reduce leverage below 5x. And we'll remain highly disciplined in our capital allocation in order to continue to move towards this goal. With that, operator, we'd like to move to Q&A.

[Operator:]

[Operator Instructions]. Our first question comes from Tyler Brown of Raymond James.

[Patrick Brown:]

So nice to see the EBITDA bridge not having any red bars in it this quarter, but it does sound like there is a few things that we should think about for the remainder of the year. So can you help me with the bridge a little bit? So basically, what is the full year drag from Hennepin, including the settlement, the New England PPA transitions and maybe the Babylon debt service this year?

[Bradford Helgeson:]

Yes, sorry, Tyler, it's Brad. So what I'll do is I'll refer you to the 2017 over 2018 bridge that we put out to support -- on the fourth quarter call to support our 2018 guidance, so on a full year basis, and obviously, you can extrapolate to the rest of the year, then I'll get the sum of the quarterly cadence second. On a full year basis, for the contract transitions, we expect a net headwind of $15 million on the waste and service side. Most of that is kind of -- 10 out of the 15 is the fact that we had a positive settlement from the related Hennepin contract in third quarter last year and this year, obviously, that won't recur. And then there is another $5 million of net headwinds for the year on energy and that's the hangover from the PPA expressions in New England. We generally see that in the first quarter because seasonal market prices are higher in the first quarter. And so compared to the contract, you didn't have much of a drag, but over the course of the year, we think it's about $5 million. So if you think about how does that -- how is that going to play out for the rest of the year, as I mentioned in the prepared remarks, we had a meaningful recovery on business interruption insurance in the second quarter, in particular, last year. So that will be a year-over-year headwind in the second quarter. The Hennepin settlement was in the third quarter. Then, of course, in the fourth quarter, from an EBITDA standpoint, we posted $20 million of EBITDA from the Dublin project. Under the joint venture, the contribution this year won't be as significant.

[Patrick Brown:]

Okay. And can you remind me on the Fairfax insurance proceeds? It sounds like it'll be about $12 million collectively for this year. What was it last in total or do you have the cadence? I apologize.

[Bradford Helgeson:]

Yes, so business interruptions are just -- in terms of what impacts adjusted EBITDA, business interruption recoveries this year we expect to be $10 million. $6 million of which we already collected in the first quarter and then we expect about another $4 million in the second half. Last year, on business interruption, as I said, we were about $17 million in total, most of which was Fairfax. There were a couple of other insurance recoverable events that we were collecting on in the second quarter, total $17 million, Fairfax most of that, that was really the bulk of the -- as it ended up, the bulk of the business interruption collections for the rest of the year. We took in about another $5 million over the third and fourth quarters last year.

[Patrick Brown:]

Okay. That's helpful. And then Maybe on the 91st Street, how should we think about the EBITDA multiple on the $35 million of capital deployed?

[Bradford Helgeson:]

It will be about a 5x multiple if you want to look at it that way in fiberglass.

[Patrick Brown:]

Okay. That's helpful. And then Steve, any update on the TAPS project?

[Stephen Jones:]

Yes. Actually, Pennsylvania issued the umbrella permit under which we'll now file for our increased kind of activities at ferrous, which -- at ferrous, excuse me, which will include the TAPS project. So we'll put that permit in shortly. We are working with our vendor who is providing the equipment and technology setup. They are doing some work at their site to kind of modularize the equipment. So we still think we're firmly on target for kind of first quarter next year operation. So things are going well there. We were waiting quite frankly for Pennsylvania to kind of describe how they would like to see the permit from us and they've done that now, and we'll be moving ahead.

[Patrick Brown:]

Okay. Just quick clarification. But is the $25 million that is not in the current growth investment outlook?

[Stephen Jones:]

No, no, that's not. It's -- and most of it -- this will be back-end loaded in this year anyway because it's -- we'll do some work, but mostly, we'll wait for the permit to process to Pennsylvania. So we're looking at later '18, early -- kind of early '19 for most of the spend.

[Bradford Helgeson:]

Yes, in totality, the approach we've taken on this, on the growth investment outlook, for this year in Rookery, as I mentioned, is a similar one where whenever there is timing uncertainty related, in particular, to regulatory approvals, rather than we shooting at a moving target all year, we'll just flag what's out there and once we have certainty, we'll formally incorporate it into the forecast.

[Operator:]

Your next question comes from Noah Kaye of Oppenheimer.

[Noah Kaye:]

When we can start with profiled waste? Just so we can kind of understand operationally. You talked about expectations for double-digit growth, again, this year, profiled waste revenue growing 1% in the quarter, but it accelerates. Just operationally, what's going on to kind of increase the flow of that profiled waste kind of given the start-up at Fairfax? I would be just helpful to understand maybe the reason for the cadence over the course of the year.

[Stephen Jones:]

Yes, now that's a good question. Our ramp quite frankly was a bit slower than I would have liked. And a lot of these related to Fairfax. As we mentioned last year, Fairfax is a big profiled waste plant. So now that it's on stream, part of our efforts are reacquiring waste that went to other places. But there was a couple of other things that happened, particularly in this quarter. Some of the weather issues given the significant snowfall throughout the serviced area in the first quarter had an impact on it. The -- there was less event work also in Q1 in last year. So that also had an impact. Usually if we do event work, Noah, we'll get more access to profiled waste. But we're pretty comfortable as we look out to the rest of the year that this will ramp up fairly quickly. The -- I mentioned the 2 areas that also play in the profiled waste, which is the kind of drug takeback programs that you're seeing a lot more momentum now in the U.S. around because of the opioid crisis. And although the volumes aren't great right now -- large right now, we won the first New York City -- or New York State RFP around drug takeback program. So that will start to roll in. And then also the regulated medical waste permit that we got at one of our facilities, which is the third one we have, allows us to be a largest receiver of regulated medical waste. So we will go out and try to pick up regulated medical waste as a disposal option, where -- and because we have the thermal treatment, because of the heat levels in our plants, we're able to regulated -- certain types of regulated medical waste. So that all -- as we get into that permit and work it out the logistics on that plant, that all feed into the profiled waste program as we go through this year. So I'm pretty comfortable we'll be hitting the double-digit numbers that we talked about.

[Noah Kaye:]

Right, great. Very good. And then you touched on developments with Rookery in U.K. pipeline. Understanding this claim was filed quite recently, what's your understanding of the next step in the process there? And maybe how should we think about a reasonable expectation of the time frame for that to get resolved and to be able to enter full-scale construction?

[Stephen Jones:]

Yes, sure. First off, let me say, I wanted to make it clear. We don't think the claim has any merit. And I think it will fail. And so in meantime, we'll be continuing to develop the project. So we have construction going on at the site already. I think I mentioned that on the last call. And so we'll continue that work -- 1 year that's impacted is really project financial close. And so we'll look at with our partners, both Veolia and GIG. We'll look at the schedule under which this claim is reviewed. And the delay could be anything -- anywhere from a few weeks potentially to a few months. But it's kind of early to assess. Like I mentioned, we're hearing from social media. So we haven't received anything yet. It's kind of a social media event at this point. We're confident that the U.K. environment agency led a very robust process. So they had 2 consultation periods, both of which were extended to allow incremental feedback and all the questions were answered by the environmental agency and the claim is really on just to give people an idea. The claims really has to be on the process held by the environmental agency. And we think that they went through a pretty rigorous process. And under the U.K. system, the loser of the suit has to pay for the cost. So this is a local opposition group. So I think that becomes a bit of a challenge. So as I said, we're confident that the claim doesn't have any merit and the environment agency is going to vigorously defend the process. And I think they will ultimately prevail in the effort. As I mentioned on timing, it's a little early to tell what that means. But I can say anywhere from a few weeks to potentially a few months.

[Noah Kaye:]

Yes. And that's very helpful. I mean -- and again, just so we understand. I mean, this is a project that could come online several years in the future, right, and you're still proceeding and this is a process challenge, not a challenge to the merits of the permit itself.

[Stephen Jones:]

That's exactly right.

[Noah Kaye:]

So it seems like there is a possibility just looking at the review process, there could be a reply in a couple of weeks or even sooner. Again, I have no legal background, but I know there are folks in your team that do? So just in case we all understand that.

[Stephen Jones:]

Yes, that's correct. It's a challenge on the process that the environmental -- the environment agency in U.K. utilize. And when I say they're set up, they go through these types of processes all the time. So they're very good at the process around granting this -- operating a waste permit. So we're pretty confident.

[Operator:]

Your next question comes from Michael Hoffman of Stifel.

[Michael Hoffman:]

Recycling, I'm curious, we had recently road expo and had Jim Warner on a panel and asked if he had started seeing any -- first of all, what this volume conditions look like in each of the two plants you operate. But he made two comments I thought were interesting. One, they have plenty of trash, so there's lots of volume. So I'm curious about what that's doing to the spot market from that? But the second was -- was he seeing any of the impact of the Chinese ban on mixed waste paper? Has it finally, moved out of warehouses and either going into landfills or coming to incinerators? And I was curious what you're seeing across your portfolio.

[Stephen Jones:]

So this is interesting. A text from a friend of mine yesterday who has a warehouse that has a lot of plastic in it and he said, "Hey, can you guys take this plastic? We don't want to put it into a landfill. We want to take it to Energy-from-Waste plant." So -- and we're starting to get some of those questions throughout our fleet. So at this stage, it's a little early to tell how all this plays out. I think ultimately, it means that there's going to be more waste in the waste sheds across the U.S. and other countries too. I mean, we've heard a little bit about this in U.K. from some of our U.K. partners. They're having issues too. Our preference is not to take the materials because it has -- as you well know, has higher energy content, this is -- plastic, in particular. So we believe the best outcome for this is to kind of sort itself out and maybe -- and I know you've not talked about this before, Michael, may be the Chinese will change some of the regulations there. They often will do that, obstruct that 1 path and then kind of head it in other direction. So we'll have to see how this plays out. But it's certainly, in our view, leading to more -- kind of more waste out there. Waste markets continue to be strong, pricing has been strong especially in New England and you've not talked about that before. Pricing strong in the profiled waste market. Our merchant plants and our transfer stations continue to be full, and so we're pushing spot prices. And so as a general matter, it's a good time to be a waste company. I think the markets are pretty darn good right now. And the China situation is just adding more waste into the waste shed.

[Michael Hoffman:]

Okay. Switching gears. I just want to make sure I'm following the path right to how I think about the model. There is $100 million in 1Q, you reaffirmed to the midpoint at $440, this is EBITDA. Given all the puts and takes you shared with us, about things that do and don't repeat or changes in profile like hedging at $50 in 1Q comes down in 2Q and 3Q, we -- should we assume to model down EBITDA sequentially? That's not bad news, just that let's make sure we follow the pattern right as $100 million goes down and then it comes up again in the second half. That's the way to think about it, right?

[Bradford Helgeson:]

Yes, I think that's right, and obviously, the second half is always the stronger period than the third quarter, in particular, which everyone knows. I think, second quarter, we don't give obviously precise guidance on the quarters, but I think your characterization is broadly accurate. It should be relatively consistent with the first quarter with maybe a bit of downward pressure. I think that is fair.

[Michael Hoffman:]

And the second -- you're reaffirming the 33% in your notes in the power point. So to get to the 33%, I got to drive down somewhere into the 25% to 35% range versus the 50% in the first to be able to make that...

[Bradford Helgeson:]

On power, yes, yes, that's right.

[Stephen Jones:]

That's correct.

[Michael Hoffman:]

Yes, okay. Just I wanted to make sure I follow that logic right. And then, just to remind me -- so all this noise around Rookery pass is you get your project financing lined up, it's approximately 90% of what you spent on Dublin. How does that show up on the balance sheet again now that the joint venture exists?

[Bradford Helgeson:]

Yes. So really our only interest in the project to the joint venture, again, would be -- in this quarter, it's in other assets, it's in the equity in unconsolidated subsidiaries with no debt in our balance sheet.

[Michael Hoffman:]

So when Rookery starts financing, none of that debt shows up in the balance sheet?

[Bradford Helgeson:]

That's correct.

[Michael Hoffman:]

Okay. I just want to make sure I remember that correctly.

[Operator:]

[Operator Instructions]. Your next question comes from Jeff Silber of BMO Capital Markets.

[Jeffrey Silber:]

I'm going to pass along a question I got from a few investors. I know it's early, but you had sizable outperformance in the first quarter. Was there any reason or did you consider raising guidance for the year or you're just being overly conservative?

[Stephen Jones:]

It's still early in the year. Look, we have -- I'm really pleased with the first quarter. As I mentioned, I think it sets us up nicely for the year. But it's only been about 50 days since we gave guidance initially. So we thought let's see how the rest of the year starts to play out. So that was really more of our thinking. I don't know, Brad, if you want to talk -- Brad might want to comment.

[Bradford Helgeson:]

Yes, I'll just emphasize going back to our description of operations in the first quarter. I mean, the plants -- frankly, the plants operated the way they should, in a way we typically expect them to, in a way that we assume they would in our guidance. So there was nothing really extraordinary in that regard. I think the first quarter candidly we benefited from, unfortunately, as it relates to last year a pretty favorable comp.

[Jeffrey Silber:]

Okay, and then drilling a bit further into the waste segment, when you -- on the Slide 4 when you talked about trends and outlooks, you talked about further increases in waste processing volume. Does that imply accelerating growth? Or are you just looking for growth to stay stable from what we saw in the first quarter?

[Bradford Helgeson:]

But to the extent it refers to processing volume, of course, our capacity is relatively fixed with Fairfax operating for full year and at now record levels, with Dublin operating characterized now as essentially a service fee arrangement for us. With added capacity, you're going to see higher processing volumes, but it isn't really an ongoing -- beyond that, necessarily it isn't an ongoing rate of growth.

[Jeffrey Silber:]

Okay. And then on the pricing side, I'm sorry, you talked about acceleration. Can you just get a little bit of color on that, maybe quantify that if possible?

[Bradford Helgeson:]

Yes. Sorry. So we saw same-store price growth year-over-year in the first quarter of 2%. We talked last quarter about our expectation for the year for that to be in the neighborhood of 3%. And we still have that view. So that implies an acceleration.

[Stephen Jones:]

We're still pretty good about our 3% number. As you go through -- as I mentioned, Jeff, profiled waste was beating my expectations in the first quarter. It's going to accelerate as you go through the year and that pricing on profiled waste is pretty not good and that will kind of carry it up from the 2% up to the 3%. Along with -- as Michael asked, along with just kind of overall good waste market dynamics at this point.

[Operator:]

Your next question comes from Brian Lee of Goldman Sachs.

[Brian Lee:]

And just a follow-up on the pricing point. I know you guys don't always think about it this way. But when we look at from a modeling perspective, you had the contracted revenue per ton on contract -- on contracted versus uncontracted streams. This is the first time in a while where I think we've seen the ASPs up year-on-year in the contracted and the uncontracted being down year-on-year. I'm sure there is moving pieces embedded in that given -- given the partial recognition of Dublin. But can you speak to some of the dynamics that drove that for this quarter. And then, I know you talked to some of the general pricing trends same-store here. But what would you say we should be thinking about for those 2 waste streams as you report them pricing-wise moving through the year?

[Bradford Helgeson:]

Hey, Brian, it's Brad. I think you touched on it. I mean, there was a mix issue going on in the averages. So Dublin being included as part of it and the pricing that we focus on in our disclosures now is on tip fee structure plans. Having owned Dublin, 100% consolidated Dublin, 100% for half of the quarter. And the tip fee has been much, much higher at Dublin than anything in our -- in the domestic portfolio that had a meaningful -- actually even for half the quarter had a meaningful mix impact. Going the other way was, of course, Fairfax coming back on is a great story, as a big contributor, but it's actually below our average just given the market it is in, it's below average on tip fee. So that for both contracted and uncontracted kind of weighs at the other way. So you do have some churn underneath the surface. I think the key numbers that we try to focus on is on a same-store basis, we see consistent growth whether it's across contracts which generally are escalating with inflation, which we now finally see are putting pressure on and then, of course, the uncontracted in the spot market and for profiled waste where we see strong and probably, improving if anything dynamics going forward.

[Brian Lee:]

Okay. Fair enough. But would you characterize it as a mixed or being a bit of headwind into 2Q and then things normalize as we get into the back half of the year?

[Bradford Helgeson:]

Yes.

[Stephen Jones:]

Probably right.

[Bradford Helgeson:]

Yes, that's not the fair way to look at it because Dublin comes out and, of course, Fairfax year-over-year is going to be mix on a comparable basis all the way through the year. So yes.

[Brian Lee:]

Okay. That's helpful. And then, just second one for me and I'll pass it on. With respect to the metals business, you're not making any changes to the pricing assumptions here despite having raised the HMS outlook, and also, the strength that we are seeing here more recently. So is it fair to assume on the ranges that you're tracking toward the higher end and you just didn't want to time the range or raise this early on in the year? Just wondering how to interpret the updated view on HMS strength and no change to your first outlook.

[Stephen Jones:]

That's a fair comment, Brian. If you look at we're -- as I mentioned in my prepared remarks, we're in the $350 range right now on HMS #1. Copper prices are really good. One of the reasons we're being a little cautious here is because of any potential retaliation associated with the Section 232 tariffs. So we're not really sure how this is all going to play out. So we thought we'd move after the HMS range based on what we've seen. But we're being a little cautious at this point. We'll see, as we go through the year and see how all this plays out and whether there are issues that come back from China and the retaliation, it will become clear. Realize too that most of our metals are actually sold in the U.S., there are some of our nonferrous or portion of our over -- the bigger nonferrous pieces go to China. But there's also other markets around the world. So again, the markets may move around a little bit depending on what happens. I don't think we'll be severely impacted or seriously impacted. But like I said, we're kind of wait and see at this point to see what happens through the next quarter.

[Bradford Helgeson:]

And then, Brian, there's also a little nuance here that this impacting this as well, where -- at least on the ferrous side. In some circumstances where historically, we have delivered product to the end delivery point. By doing that, we incur transportation cost and charge a higher revenue per ton effectively. We, in some cases, have been entering into arrangements that are FOB, the door of our plant, i.e., the offtaker takes control of the material at our plant. So we're not incurring the transportation cost anymore, but revenue comes down. So long story short, that's a situation where the revenue doesn't necessarily tell the whole story.

[Brian Lee:]

Okay. That's helpful color. Last one for me and just a follow-up here. Is that shipping issue sort of what you're budgeting for potential Section 232 retaliation playing in and all to the slight volume down takes on both ferrous and nonferrous on your outlook for 2018. I might have missed that, but what were the drivers behind the down takes there?

[Bradford Helgeson:]

There is the other -- there is another nuance here that you kind of picked up on which is we have changed the accounting for the way that the Dublin ash and metals will be handled, where we had provided our initial full year guidance assuming that we book revenue for the sale of metals. The way -- the approach in Dublin, and this is consistent with the waste done primarily in the U.K. as well, is the metal value -- the metal sales are effectively netted against your ash cost. So we've decided to change to, we think, a more appropriate accounting treatment in Dublin's case where the metals revenue is netted against cost. So again, we get the benefit elsewhere, but in terms of our statistics for the tons sold that generate revenue, they came out of the number. On nonferrous, we adjusted it slightly just based on volume processed at the centralized processing facility and just the timing of some recovery projects.

[Operator:]

There are no further questions at this time. I will now return the call to Steve Jones for final comments.

[Stephen Jones:]

Thanks, everyone, for taking the time to talk about our company. We were excited about the first quarter and as the year goes on, and we appreciate -- we know you're all very busy, it's earning season, and we appreciate taking the time to share your questions with us and talk about where Covanta is headed. So thanks, and have a good day and a good weekend. Take care.

[Operator:]

This concludes today's conference call. You may now disconnect.