Covanta Holding Corporation
Q2 2017 Earnings Call Transcript
Published:
- Operator:
- Good morning everyone and welcome to the Covanta Holding Corporation's Second Quarter 2017 Financial Results Conference Call and Webcast. An archive 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 introduction, I'd like to turn the call over to Dan Mannes, Covanta's Vice President of Investor Relations. Please go ahead.
- Dan Mannes:
- Thank you and good morning. Welcome to Covanta's second quarter 2017 conference call. Joining me on the call 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, Steven and Brad will be referencing certain slides that 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 our website www.covanta.com. These prepared remarks should be listened to in conjunction with these slides. Now, onto 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 can 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, July 28th, 2017. 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 have been prepared in accordance with GAAP. For more information regarding definitions of our non-GAAP measures and how we use them, as well as imitations as to their usefulness for competitive 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 and good morning everyone. For those of you using the web deck, please turn to slide three. I'll start off with a quick overview of our financial results and the key drivers impacting the quarter. Adjusted EBITDA for the quarter was $93 million, which represents an $11 million year-over-year improvement. Free cash flow was negative $21 million, down $16 million compared to the prior comparable period. These results were in line with our expectations and we are reaffirming our full year 2017 guidance. Our fleet exhibited strong operational performance in the quarter and we continued to benefit from favorable waste markets and impressive growth in the Covanta Environmental Solutions business. Insurance recoveries in the quarter helped to offset some of the impact of downtime events in this prior periods the Fairfax fire. Commissioning of the new Dublin EfW facility continues and we remain on track for commercial operations by the start of Q4. We're currently processing waste and testing both boilers with synchronization that turbine generator to the Irish electrical grid to come shortly. As operations continue to stabilize following initial startup, we'll then move in to performance testing of the facility, our initial schedule for plant commissioning left room anticipation of the challenges that inevitably occur with a large complex infrastructure projects like Dublin. This facility is one of the most technically advanced in the world and we're excited to provide the Dublin region with a clean, sustainable waste management solution for decades to come. At the Fairfax County facility, we completed a repair and replacement of refuse cranes and are operationally ready to resume processing waste. We are now working with the Fairfax County Fire Marshal's office to finalize plans for upgraded fire protection and suppression equipment. Once final, it will take approximately two months to install this equipment before we can restart the plant. We previously assumed a late Q2 restart; however, as this process has taken longer than initially anticipated, we're now expecting to restart in Q4. As previously discussed, our property insurance program is structured to provide recovery of the cost of repairs and replacement as well as lost income through business interruption coverage. We carry robust coverage for such events so the net financial impact is minor. As we walk through the quarterly results and our full year outlook on a line item basis, you will see that the downtime at Fairfax impacts topline revenue and the associated production metrics for waste volume processed, electricity produced, and metals recovered. However, the key message here is that our outlook for annual adjusted EBITDA generation is unchanged due to expected recoveries under our insurance policies. Waste market remains strong and during the quarter, we continued to drive positive same-store price growth rate, both from market improvements and increased volumes of profile waste. The Covanta Environmental Solutions platform continues to perform well as it procures profile waste and expands its service and processing capabilities. The second quarter also marks to start-up our new non-ferrous processing facility in Eastern Pennsylvania. This facility, which is now processing over 70% of our recovered non-ferrous, is beginning to drive materially higher realized prices. On the business development front, we entered into an exclusive Joint Development Agreement with Biffa, which is a leading U.K. integrated waste management company, for two new EfW facilities. We're excited about this partnership, which further enhances our pipeline of development opportunities in the robust U.K. Energy-from-Waste market. Now, I'll get into the detail on our markets and operations. I'll start with the Waste business. Please turn to slide four. In our waste contract portfolio, we reached a new five-year tip fee contract with one of the largest clients at our Delaware Valley Pennsylvania facility. We're happy to continue to provide sustainable waste disposable services to this client, which represents over one quarter of the capacity at this very large plant. On the Environmental Services side, we closed another small acquisition in the pharmaceutical space as we buildout our network and service capabilities in this attractive growth market. We see great opportunities such as drug takeback programs in this area. During the quarter, EfW processing revenue was $4 million higher year-over-year despite the downtime at Fairfax, which speaks of the overall performance of the fleet in the quarter. Same-store price growth was 3.3% in the quarter, driven by contractual escalation, higher spot market prices and yet another quarter of 10% growth in profile waste. The impact of lower volumes due to the downtime at Fairfax was $8 million in the quarter, while the rest of the fleets are all higher availability and waste volumes processed year-over-year. Contract transitions modestly benefited revenue as we were able to improve the pricing relative to some of our legacy contracts. The Covanta Environmental Solutions platform produced yet another quarter of excellent performance. Effective sales efforts drove another quarter of double-digit growth in internalized profiled waste. At the same time, the material processing facilities and site services also grew over 20%, with roughly equal contributions from organic growth and acquisitions. Now, let's move on to Energy. Please turn to slide five. Contracted and market prices were higher on a year-over-year basis, while contract transitions represented another $7 million headwind as expected. The mild summer to-date on the back of a mild winter has led to high levels of natural gas in storage, which continues to weigh on power prices. However, given our highly hedge position, we have limited remaining exposure for the rest of the year, so we are tightening our range on forecasted open-market pricing. We continue to actively hedge our exposure going forward. We've already hedged over 2.6 million-megawatt hours of our production for 2018, which, when combined with our contracted position, we've only about 30% of the 2018 forecast for power output, subject to market prices. Let's move on to the Metals business on slide six. In the area of ferrous metal, realized prices increased 13% on higher HMS index prices year-over-year. This was offset by lower recovered volumes as well as shipment timing from our centralized processing facility. We do not expect additional ferrous inventory build, implying stronger sales volume in the second half. Ferrous prices remain strong; with a HMS number #1 Index averaging $263 per ton in the second quarter. The HMS index price for July at $265 per ton and with the year-to-date HMS price now -- price is now well ahead of the low end of our previous full year forecast, we're tightening the range to $225 to $250 per ton. U.S. steel mill utilization remains high and a demand for scrap is in solid. However, we do see some risk-to-pricing in the second half of the year, given the low relative cost of competing materials, like iron ore. On the non-ferrous side, revenue declined by $2 million on a same-store basis. The quarter benefited from the start-up of the centralized non-ferrous processing facility, which largely drove a 38% increase in realized revenue per ton year-over-year. As previously discussed, processing also reduces the volume sold, which offsets some of the price benefit. But the net trade off represents significant additional value. Another factor impacting the quarter is sales timing. One of the highest value fractions that we're now separating is copper and the sales cycle for copper is longer as much as a client base is located in Europe. This can require 120 to 150 days from initial departure to final completion of the sale. The cost and time of these greater logistics will more than pay for themselves in higher prices, but they depressed the realized sales volumes in the second quarter. As we move through the rest of the year, we should quickly lap the initial period of extended sales realization and we will also look for opportunities to sell the product in ways that reduce the lag without sacrificing value. Let's now move on to maintenance and operating expenses. Please turn to slide seven. Total EfW maintenance spend in the quarter, including both expense and CapEx, was $110 million versus $109 million in Q2 2016. Looking at the full year, our outlook for EfW maintenance expense and maintenance CapEx is unchanged. First half total EfW maintenance spend represents 62% of the full year forecast, which is similar to our experience the last two years. Other plant operating expenses increased 3.4% on a same-store basis compared with Q2 2016, driven by expenses related to the growth in Covanta Environmental Solutions platform, the start-up of non-ferrous processing facility, and overall wage and benefit escalation. Same-store cost for the EfW assets were relatively flat year-over-year. During the second quarter, we recognized $20 million of insurance recoveries, which are recorded as a contract expense in the other operating cost line. $17 million of these recoveries related to business interruption claims, which are included in adjusted EBITDA. While we recognize significant amounts related to the Fairfax incident in the quarter, it will ultimately take time to completely settle the claim. Given the expected timing of coming back online, incremental recoveries are now expected to come later in the year and into 2018. Looking ahead, I'll quickly wrap-up with a note on our progress in building out our development pipeline. We recently signed a Joint Development Agreement with Biffa to work exclusively on two new projects in the U.K. One of which, we've been developing, the Protos project near Liverpool, and one that Biffa has been developed -- developing, the Newhurst project in Leicestershire, England. This is a great partner for us as they have access to large volumes of waste and substantial local market knowledge, hence, providing a complementary skill set to our operational expertise. Eventually, we'll be structured with Biffa as the primary waste supplier and Covanta as the operator, with both parties having the equity position. From a timing perspective, these projects are likely behind the Rookery project and we expect to have further updates on these promising opportunities sometime early next year. In closing, at the midway point for the year, I can clearly say that we've made substantial progress in all areas of our strategic focus. So, plant operations, capturing additional value from recovered metal, continuous improvement, growing our waste business, and continuing to build a new project development pipeline, and we remain on track on our full year financial plan. With that, I'll turn the call over to Brad to discuss the second quarter financial results in more detail.
- Brad Helgeson:
- Thanks Steve. Good morning everyone. I'll begin my review of the second quarter 2017 financial performance with revenue on slide nine. Total revenue was $424 million in the quarter, up $6 million over Q2 2016. Revenue increased $9 million on an organic same-store basis. Within that amount, our core business activities, excluding commodity price changes increased $3 million year-over-year. Strong waste price growth and the expansion of Environmental Solutions business more than offset a $15 million revenue loss from the downtime at Fairfax, as well as the impact of a longer sales cycle for the overseas export of processed non-ferrous. Recycled metal prices represented a $3 million tailwind as we saw improved markets for both ferrous and nonferrous material. Energy prices drove a further $3 million increase year-over-year as we experienced modestly higher market power prices and some improvement under power contracts that have market linkage. In addition to organic growth, the three smaller Environmental Services acquisitions we completed in the first half, contributed $2 million in the quarter. Contract transitions were a net $5 million headwind year-over-year as the $8 million impact of long-term power contracts rolling off was partially offset by the benefit of increased energy revenue share following service contracts expirations and also improved pricing on new waste contracts. Moving on to slide 10, adjusted EBITDA was $93 million in the quarter, an $11 million of increase compared to the same period last year. On a same-store basis, adjusted EBITDA was $15 million higher year-over-year. Excluding the benefit from higher commodity prices, adjusted EBITDA related to core business activities was higher by $9 million in the quarter. In addition to the items that benefited revenue, we also received $17 million of business interruption insurance proceeds in the quarter, which offset lost revenue from the downtime at Fairfax. Commodity prices were a net benefit to adjusted EBITDA with metals and energy prices each contributing $3 million on a year-over-year basis. Transactions had a modest net impact on the quarter, adding $1 million to adjusted EBITDA. Contract transitions represented a $5 million net decline and a $8 million negative impact from the expiration of above market long-term power contracts, was partially offset by waste and service contract transitions. Overall, adjusted EBITDA is tracking on plan, so we reaffirmed our full year guidance range of $400 million to $440 million, as Steve had mentioned. Before moving on, I'd like to provide a little more color on the business interruption insurance proceeds, both in the quarter and for the balance of the year. Of the $17 million in BI proceeds received in the quarter, $10 million related to Fairfax and represents the recovery of lost revenue, net of variable costs of production. The balance of the proceeds related to two other events, which occurred in 2016 and early 2017, which we had mentioned in our last quarterly call, so it's a bit of a timing benefit in the quarter from those. We expect to receive incremental proceeds while the Fairfax facility remains down, with the overall amount of the claim depended upon when the plant returns to service. For modeling purposes, we believe that $10 million represents a rough, but fair approximation of the amount that will ultimately be recoverable under our insurance for each 90 days of downtime. As Steve mentioned, we have revised our full year forecasts for revenue to adjust for longer downtime at Fairfax, so please take that into account as well. As for the timing of business interruption recoveries, which drive the accounting and impact on adjusted EBITDA, we currently anticipate the receipts for the balance of the year will be more heavily weighted towards Q4, with final recoveries not expected until 2018. This will impact our adjusted EBITDA recorded in calendar 2017, but again, we're reaffirming guidance taking this into consideration. Turning to slide 11, free cash flow was negative $21 million in the second quarter compared to negative $5 million in the prior year. Excluding changes in working capital, free cash flow was $2 million lower year-over-year. While adjusted EBITDA was higher, maintenance CapEx was higher as well. As previously discussed, this primarily relates to the timing of scheduled projects. Note that we maintained our full year outlook for maintenance spend. We also reaffirmed our full year guidance range for free cash flow of $100 million to $150 million, which implies a much stronger second half. This is typical given the seasonality of our business. Turning to slide 12, our growth investment outlook is unchanged from our first quarter call. The Dublin project remains on schedule and the funding for the remaining CapEx is already in place through non-recourse project debt. We continue to advance on our opportunities to make very high return organic growth investments, particularly, in the Metals, Ash Management, and Environmental Solutions areas. However, we also remain prudent and selective in our growth investments, pursuing our long term strategic objectives, while also prioritizing balance sheet deleveraging going forward. Without that as a segue, I'll conclude with an overview of our balance sheet and leverage ratios on slide 13. Net debt increased by a little over $125 million in Q2 to $2.79 billion. This was on plan, given the continued drawdown of non-recourse project debt to fund construction of the Dublin facility, as well as our seasonally negative free cash flow in Q2. The net debt to adjusted EBITDA ratio at the end of Q2 was seven times. As I said on our last earnings call, we expect leverage to peak either this quarter or in Q3, while the fourth quarter will commence the trend of sequential improvement, with leverage expected to move back down below six times as we exit 2018. The leverage ratio covenant under our senior secured credit facility was 3.5 times at June 30, versus the coverage limit of four times. This covenant excludes both the unsecured holding company debt as well as the project debt at Dublin with the latter been included in the ratio once the facility has been operational for a year. Additionally, we continue to make substantial liquidity with $335 million in undrawn capacity under our revolving credit facility. With that, operator, we'll pause and open the lines for Q&A.
- Operator:
- [Operator Instructions] And your first question comes from the line of Tyler Brown with Raymond James. Your line is open.
- Patrick Tyler Brown:
- Hey good morning guys.
- Stephen Jones:
- Good morning Tyler.
- Brad Helgeson:
- Good morning Tyler.
- Patrick Tyler Brown:
- Hey Steve, I'm not sure if Derek is in the room, but it looks like he deserves a big thumbs up on the MSW pricing. But just looking, specifically, at the contractual rates, I mean, it was up a very healthy 4%. Can you talk about some of the dynamics that influenced that number? I'm just curious if there was a little bit of mix or contract resets or just how we should think about that number going forward?
- Stephen Jones:
- So, a little bit of both. So, we had some contract resets. Some of the contracts that we're signing now and we talked about SECONN and then the Delaware contractor, we're seeing higher pricing, the markets tightening up. It's a good time to be a waste company. You probably saw with some of your other -- some of the other companies that you follow. So, that's all driving that contract in pricing up. On the uncontracted, it's really in -- stock markets tightening up and profiled waste has been having good performance. We just focused on our profiled waste pricing this year, so that's coming through fairly clearly. I don't know, Brad, if you want to add to that?
- Brad Helgeson:
- It's a good climate out there for pricing.
- Patrick Tyler Brown:
- Yes, good momentum. Okay. And then Steve, I know, it's kind of hard to see, but it feels like the fleet ran really well this quarter outside of Fairfax. I was just curious if you could maybe give us some color on the operations, ex-Fairfax, maybe on boiler or turbine availability? And do you think that momentum could continue?
- Stephen Jones:
- I don't want to give you the exact number on that, but we had really good performance with respect to the plant, so expect for Fairfax. And I think I mentioned that some -- on last quarter's call, there's always some level of things going on the plant. I get a morning report and follow that as we go through the quarter. But it's been pretty strong, I think, probably we're in a record availability range right now if he you exclude Fairfax. So, I think Mike de Castro and his team, the supply chain team, have been doing a really nice job of running the plants. And quite frankly, I think we've been smarter in how we're spending our money on the plants and that's coming through on better on-time, on-stream availability with the plants.
- Patrick Tyler Brown:
- Okay, that's great. And then just the last one. So Brad, a couple of housekeeping items. I just want to make sure I'm straight on the model for Q4, assuming a full quarter of contribution from Dublin. So, a couple of questions here. First, how much should we expect DNA to step up? Two, how much should we expect to get book interest expense to step up? And then third, I'm kind of a dummy on this, but how are the preferreds going to be treated on the income statement? And where actually do those even show up on the cash flow?
- Brad Helgeson:
- Yes. So, I mean, I'll start with EBITDA and our guidance has been, for Dublin, to contribute on a full year basis, $60 million of EBITDA, while $20 million and I'll kind of stick with the full year and then we'll get to the fourth quarter. On an annual basis, the interest expense on the project that's about $20 million and then about $10 million is the preferred dividend, so remaining free cash flow of $30 million. On an EBITDA basis, assuming a full fourth quarter of operations, which is what we're targeting, that would roughly equate to $15 million of EBITDA and then the P&L impact of the interest and the preferred would be the same way. The preferred, actually, it's not going to run through the interest expense line, it will run through other expense. But it'll flow through the cash flow statement, so it'll all be 'above' the line in the calculation of free cash flow.
- Patrick Tyler Brown:
- Okay, good color. I will hop back in the queue. Thanks.
- Operator:
- Your next question comes from the line of Noah Kaye with Oppenheimer. Your line is open.
- Noah Kaye:
- Thanks. Good morning gentlemen. Congratulations on a strong execution. To Dublin, very good to see that the plant is still on track for full quarter production in 4Q. But just for folks who are, maybe, not familiar, you mentioned a couple of the steps that need to happen. Typically, at this stage, is there anything that we should be cognizant of that could, maybe, push that out a little bit? Just in your experience on ramping these things? How should we be thinking about kind of the probability here to hit that mark?
- Stephen Jones:
- Well, commissioning, generally, has of kind of puts and takes to it. We actually had built extra time in commissioning and as it -- look at this plant. So, the five weeks or so that we couldn't burn waste. And we could do have a commissioning, by the way, in other and finish off construction activity during that period of time, which we did. But that still left us time to hit our Q4 start as we talked about. So, what you'll see now, what's going on after now is we're burning waste. We burn waste on -- in both boilers. Boiler 1 is currently running burning waste. Boiler 2, we're tuning that up. The next real step in the process is synchronizing the turbine. And that will happen over the next week or so. And then after that, we'll move into performance testing, so that's the sequence of events. We're comfortable that we still got plenty of time to hit the Q4, beginning Q4 start time and so we'll work through that process. There could be puts and takes additionally, but we feel even with additional puts and takes, we're on track for the Q4 start.
- Noah Kaye:
- Okay. Thanks very much. Maybe turning to cost items. I think in the past, you've given us some idea where you're at with the piloting beneficial ash for you. Can you give us just an update there on whether separate stand?
- Stephen Jones:
- Yes. So, we're in the permitting process now, particularly working at -- looking at of the primary side we'd like to utilize is the Fairless Hills facility, so where we have the ferrous and non-ferrous processing systems. We like to put the ash processing there also. So, we're working with the State of Pennsylvania on the permitting that's going on there. I'm hoping, we're expecting that we'll get done that through the end of this year and then we'll start to -- we're -- and at the same time, we're designing the system, we'll buy the equipment in around that at the end of the year timeframe, and then assemble it in the next year. So, we're probably talking later next year, by the time we start operations, if all goes as planned.
- Noah Kaye:
- And if I could just sneak one more in since you mentioned permitting. I understand that the public console period for the Rookery environmental permit has closed, not sure what that implies in terms of the timeframe for decision. But I have to ask that, how optimistic are you at this point in getting that environmental permit and being able to move forward with the project?
- Stephen Jones:
- It's usually is a permit that's trickiest to get is the planning permit. And so on Rookery, we've had that, so we expect to get the environmental permit. It's usually just -- but for the passing at time in going through the procedure, you get the environmental permit. So, we expect we'll get that.
- Noah Kaye:
- Okay, great. Thank you so much.
- Stephen Jones:
- Yes. No problem Noah.
- Operator:
- Your next question comes from the line of David Katter with Baird. Your line is open.
- David Katter:
- Hi guys. Thank you for taking the question and congrats on the quarter.
- Stephen Jones:
- Thank you.
- David Katter:
- I was hoping to discuss Fairfax quickly and if you guys could -- I know you briefly touched on timeline for what needs to happen to come back online. How should we view any potential risks there? And when might you know or have a fair idea for when it will get online?
- Stephen Jones:
- So, at this point, we're ready to process waste. We -- I think I mentioned early on, we had damage to the crane, the three cranes out there, the three cranes are on-site. And but we're really working with the Fire Marshal's office now in Fairfax County about the installation of the fire protection and suppression equipment. So, you think about this, it's been 25 years since this facility was built, so the code has changed a little bit. And we're also looking and there's new technology out there to take this to another level of protection. So we're working through all that with the Fire Marshal. We're hoping to -- well, I'll hear from them shortly, I mean we've kind of been back and forth on a number of different iterations. Once -- and as I mentioned in my prepared remarks, once we get the green light, it'll take about two months to install that equipment, the suppression equipment. Really, with our insurance coverage, there's really no real risk, the financial impact is -- net financial impact is minor, and there's no limitation on our insurance recovery, so it's not like that the business interruption to hit a drop-dead day, so none of that comes into play. So, we're really just working on the interface with the Fire Marshal's office at this point.
- Brad Helgeson:
- Yes, I'll just add to that. The net financial impact is going to be essentially neutral, not to say that everybody isn't aligned in having the plant come back up as soon as possible. We have every available resource focused on exactly that. But financially, it'll net out, I think the only impact you see is just around maybe some lumpiness quarter-to-quarter and potentially, over the end of the calendar year, depending on the timing of the insurance recoveries.
- David Katter:
- Got it. That was helpful. And thinking of one more question. I was hoping maybe you guys could provide a more color on Biffa? And your project development pipeline in general? Are you comfortable with where you stand? And thanks.
- Stephen Jones:
- Yes, and one of the reasons I wanted to, at least, mention the Biffa Joint Development Agreement, as Biffa mentioned it, a month or so ago. So, one of the things I talked about when I first started at that August Investor Day was that I wanted to get a more robust business developer pipeline, this is the next step in that process. It's a setup similar to what we have with Veolia. Biffa brings kinds of waste management expertise; we bring the energy from waste expertise, so I think it's a good potential partnership. It's -- those projects are out after Rookery. So, and just so to be clear, we've realized that our balance sheets under some pressure, so we get it that we need to be kind of cognizant of how we might fund these. And we're not even at the stage of even thinking at about how it's all going to play out. But we get it that we have to be careful in how we proceed with these projects from that perspective.
- David Katter:
- Excellent. Thank you guys.
- Stephen Jones:
- Sure.
- Operator:
- Your next question comes from the line of Michael Hoffman with Stifel. Your line is open.
- Michael Hoffman:
- Thanks for taking my questions Steve, Brad, and Dan. Hey Brad, at the -- on the page 13 where you show the leverage, the 3.5 that's the senior credit, that's all the holding the company debt and so that's the way to think about that, just so I'm remembering correctly?
- Brad Helgeson:
- It excludes the holding company debt. So, it's a secured debt at Covanta Energy LLC, the main operating subsidiary holding company. So, to take out the $1.2 billion of high yield and then also take out the drawn project debt for Dublin, until we get an anniversary of LTM EBITDA contributing.
- Michael Hoffman:
- All right. So, is there another way to slice this, I mean when I think about the project debt, it's aligned to a set of cash flow, so that kind of really -- it doesn't really have a risk because it's tied to Dublin. So and my thought is the fair amount of room at the holding company to fund this growth opportunity, so if you chose to need to access equity that way, using your balance sheet, not common equity, but I mean, just the cash you are going to invest for the equity. Am I correct in that?
- Brad Helgeson:
- I think so. I mean, I -- we're already, be really clear, we are really prioritizing delevering the balance sheet from where we are today. I think that the business model, the balance sheet, is set up to support seven times. There are no issues, practically speaking, associated with that. But it doesn't leave us in a place that has the kind of flexibility that we want. So, that ratio needs to and will go down. That being said, I think, the high-yield deal we did in March was a great example. We were above six times, approaching seven times at that point in time. I have been very open, of course, what the trend of the leverage is going to be for the balance of the year. And we refinanced 7.25% notes at five and seven, eight, the deal was 10 times oversubscribed. So, I think the credit markets would agree with you. That being said, that's not something we take for granted and this balance sheet will be delevered as we exit this year and into next year.
- Michael Hoffman:
- Okay, fair enough. So, as I think about the Rookery spend, because that's the next one, if I remember correctly, it's about 80% of the size of Dublin. So, to kind of oversimplifying this, take 80% of the dollar, total dollar numbers, and then think about as sort of two-thirds, one-third is debt-to-equity and then layer that in over a three year period, starting 2018, 2019, 2020 and then it goes live in 2021, it's an oversimplified way to approach it, is that a reasonable approach?
- Stephen Jones:
- Yes, it is. The one additional calculation is to adjust for the fact that we're not 100% of the equities, so take your 30%, multiply that by -- assume 80% for our majority stake in the project.
- Michael Hoffman:
- Okay.
- Stephen Jones:
- And we're looking at different options as far as when the timing of the equity would go in. But assuming for long-term modeling purposes, I think what you described is entirely appropriate.
- Michael Hoffman:
- Okay, fair enough. And again, for -- because Dublin starting in October 1, this makes the thinking about this year-over-year change a little more competitive. So, if I'm -- listen, I'm creating a scenario. Dublin goes live, fully effective January 1, 2016, -- 2017 free cash flow comes at your midpoint. So what's that, 125? What's the incremental contribution from Dublin to free cash flow in 2018, just starting with 125 and then add Dublin? Just factoring in that there's cash interest and cash dividend has to be paid out?
- Brad Helgeson:
- Yes. So, the full year free cash flow contribution, I had to mention this a few minutes ago, is $30 million. So, if you start in Jan 1, or before Jan 1, obviously, we see contribution from Dublin of $30 million in calendar 2018. If you want to think about in terms of kind of the difference in the anniversary if we start October 1 versus Jan 1, becomes a little bit more competitive with the timing of some of the initial working capital, timing of interest payments of the working capital element to this that have some variability. But on a full year basis, it's the $30 million.
- Michael Hoffman:
- Okay. So I start with, if you do the midpoint at 125, I start with the 155 as the starting place for your pointed growth?
- Brad Helgeson:
- Yes.
- Michael Hoffman:
- That's the way to think about it. Okay. And then Steve, with regards to waste markets, you have 10 transfer stations, it takes in lots of volumes that some goes to your own plants, but given how good the markets are, I'm presuming your transport stations are doing really well. I mean you have an eye on the underlying garbage market.
- Stephen Jones:
- Yes. So, and you probably heard it from some of the other companies that you're following. I mean there's a lot of waste volume out there right now, which gives -- and you can see that then coming through our own pricing. So, yes, as I have been saying to folks over the last year, so -- and it's really clear this quarter, it's a good time to be a waste company.
- Michael Hoffman:
- And that allows you to walk out so that merchant pricing as well, even on MSW? So, this isn't just profiled waste during this, you're getting a help, some help, on the MSW side, too?
- Stephen Jones:
- That's correct.
- Michael Hoffman:
- Okay. And then on the $2.6 million that's hedged for 2018, can you give us a rate so we can start factoring that into our models since it's a known?
- Brad Helgeson:
- We're in the low 30s.
- Michael Hoffman:
- 33?
- Brad Helgeson:
- That's low 30s, yes.
- Michael Hoffman:
- Yes. Dollars matter, guys, so that's the model...
- Stephen Jones:
- We're just chuckling.
- Brad Helgeson:
- I mean, look, we haven't given 2018 guidance, as you know. So, I think as we approach the end of the year, and we're wrapping up our hedging activity for next year, we'll think about giving some advised guidance on that number.
- Stephen Jones:
- Yes.
- Michael Hoffman:
- All right. The last item, so you're not, per se, shipping volume -- the recycle volume, to China, but China's going to reply to the WTO since their other efforts to trying to clean up the residual showing up and stuffing ship to them for reuse. The one that becomes interesting for you is on the steel side, and the scrap steel side, to agree that any of that might end up in China in electric car furnaces. Are you -- is there any concern on your part that any of this effort closes down some of that part of the export market? I'm less worried about fiber, high-quality fiber and high-quality plastic, but the steel market seems the one that might be even a little more at risk.
- Stephen Jones:
- We've looked at this and we don't think it's going to have a big impact. We don't have that much ferrous that's going to China. So, I don't think it will have a big impact. And then on the kind of on the other side of that, you have -- what is it, Executive Order 232, which is been looking at and that actually may limit some of the steel coming into U.S. I think the President Trump is looking into that, so it's interesting there's some gives and takes from a trade standpoint that are out there right now, and then we're watching all that.
- Michael Hoffman:
- Okay. Thank you very much.
- Stephen Jones:
- Thanks.
- Operator:
- Your next question comes from the line of Jeff Silber with BMO Capital Markets. Your line is open.
- Jeff Silber:
- Thanks so much. Just wanted to circle back to the discussion you had on your profiled waste business. It's been making some nice contribution both in terms of volume and pricing. Can you remind us, roughly, what that contribution is, maybe as percentage of tonnage and where you think that will be overtime?
- Stephen Jones:
- Say that again, I'm sorry.
- Jeff Silber:
- I'm sorry. Looking at your profiled waste contribution, I'm just wondering what it is as a percentage of the tonnage that you're process and where you think that can grow over time?
- Stephen Jones:
- I'm sorry, yes, it's -- out of 20 million tons that we process, it's about 1 million.
- Jeff Silber:
- Okay. So, still relatively [Indiscernible] obviously--
- Stephen Jones:
- 500,000 to 1 million, yes. So, relatively small, one of the things that talked about in the past is we can add another 1 million without -- as we bring more volume in. So, we've got a pretty long runway if you think about 10% to 15% growth year-over-year and that's what we've seen over last couple of years in that range. So, we got a pretty long runway. But then what we'll do is we're really looking at kind of out past that next million ton, how do we kind of move around some of the MSW contracts that we have in place, so we can create more room for profiled waste. So, we've got a pretty good run rate from a volume standpoint -- potential volume standpoint.
- Brad Helgeson:
- Yes and given that the pricing of that material punches far above its weight from a revenue standpoint. It's, as Steve said, it's about 5% of the volume processed in the plants, it's over 10% of our revenue. So, over $100 of ton on average. So, of course, every incremental ton that we bring in has a pretty meaningful impact from mix standpoint.
- Jeff Silber:
- Actually that was going to be my next question, so I appreciate that. And then just maybe one follow-up. On the Fairfax impact, I just want to try out the math straight, in the quarter, it was a detrimental impact about by $8 million on the waste side and $7 million in energy, that's how we get to $15 million in total? Is that correct?
- Brad Helgeson:
- Yes. That's right. That's right, yes.
- Jeff Silber:
- So, in terms of changes you made to your revenue outlook for the year, that was pretty much is there is anything -- obviously I know there's been some pricing changes, but anything else we need to know about besides the Fairfax impact?
- Brad Helgeson:
- No, no, I mean, we're operating right in the middle in terms of our plan as Steve commented earlier. If you exclude Fairfax, I mean, the plants are running great. So, no. If not the for Fairfax adjustment, we'd be right in the middle of what we have thought at the beginning of that.
- Stephen Jones:
- Yes. I mean the interesting think on Fairfax is its running but we ensured for these kind of events and so the insurance is filling in the hole, if you will, right. So, and that's -- and I know it's tough when you try to run your models and do the analysis, but that's generally what happened here as we ensured for this type of event and expect for the -- and you think about business interruption, expect for the 15-day deductible, if you will, we're kind of covered.
- Jeff Silber:
- Okay, that's very helpful. Thanks so much.
- Stephen Jones:
- Yes. No problem.
- Operator:
- Your next question comes from the line of Brian Lee with Goldman Sachs. Your line is open.
- Brian Lee:
- Hey guys, thanks for taking the questions.
- Stephen Jones:
- Hey Brian.
- Brian Lee:
- Hey, good morning. Couple of them here. First off, the maintenance spend in CapEx, you guys have always well laid that out pretty well. Just wondering with York and Dublin not in the numbers for the first time starting in 2018, what should we think about in terms of the new normal for growth rate CapEx trends from here? I know if I look at just from the past few years organic and acquisition, as you guys break it out, has been around $45 million to $55 million a year, so just wondering if that's a right base range to think about? Or how we should be forecasting that?
- Brad Helgeson:
- Yes. Brian its Brad. You mean you're referring to the Durham-York facility?
- Brian Lee:
- Yes, Durham-York and Dublin.
- Stephen Jones:
- Yes, Durham-York and Dublin now being in the fleet, if you will, right.
- Brad Helgeson:
- So, beginning the year, we laid out a range and a fairly wide range and this reason for that, which I get to in a second, but he laid out a range for the next three years, which included everything that was on the horizon at that point in time, including Dublin, including Durham-York. But the reason for the width of our range is just the timing of these projects at some of the plants. I mean if we have a major turbine outage at a plant that could be a $5 million item. You have a few of those during some lumpiness when you look at it over time. So, I think the important thing is that the current level of spend was in the range that we've laid out is a level of spend that we think is appropriate to be investing in the project.
- Brian Lee:
- Okay. Can you -- I thought you guys had quantified the maintenance spent pretty clearly. Maybe I missed it, but have you guys also quantified the range of growth CapEx that you expect for the next few years?
- Brad Helgeson:
- Sorry, I think maybe I missed that part of your question. No, we haven't. I think If you look at our spending this year, I think it's a -- we've said in the past is that the $30 million, plus or minus around that number, is probably good assumption for -- I hope, for hope meaning that hopefully we'll continue to have these kinds of opportunities in Metals and in Covanta Environmental Solutions. That's probably good assumption for that level of spend for those types of projects. Of course, the Dublin project is winding up as we enter next year, there'll be more CapEx for Dublin because the project will be built. And then any other large project development CapEx will be based on -- will obviously be based on -- if and when, we're moving forward with a new project in the U.K.
- Brian Lee:
- Okay. Great. And then just a follow-up on few of the earlier question on the U.K opportunities. With Rookery on the two new different projects under JDA, it sounds like you're making good progress there. So, wondering if you could remind us, which plans you're targeting to be a majority equity investor versus a minority investor? And then depending on the size of the capital commitment, are there scenarios where your investment in these projects would potentially necessitate a change to the dividend policy? Just thinking about your earlier comments, Brad, about balancing your delevering priority, but not wanting to necessarily forego growth opportunities because of that?
- Stephen Jones:
- Yes. So, with respect to the splits on the Rookery project, we will be a majority owner of the equity in that project on the Biffa project to be determined still. And I don't expect at all that our dividend will be impacted by this. I mean -- and as I mentioned in one of the earlier questions, I mean, we get it that we've got the dividend; we've got pressure on our credit ratios. We're working through now on how do best navigate those various points, so and more to come on that, but we're cognizant of the issues.
- Brian Lee:
- Okay. And just quickly and I'll pass it on. I know you alluded to this and not sure if you can provide a bit more color, but the timing for any potential equity investment on your part? It sounds like there are some optionality there, but is it typically at the start of construction? Or what sort of options would you have to space that out and over what type of timeframe? Thanks guys.
- Brad Helgeson:
- Yes. I mean, it actually be structured across the full spectrum, so you could have equity go in first, which is the way we did Dublin. We could structure a bridge for the equity with an [Indiscernible] backing, have it come in at the end or we can do a pro rata. So, actually the full menu is on the table for us.
- Brian Lee:
- All right. Thank you guys.
- Stephen Jones:
- Thanks.
- Operator:
- Your next question comes from the line of Tyler Brown with Raymond James. Your line is open.
- Patrick Tyler Brown:
- Hey, I just had a quick follow-up, Brad. But when we think about Fairfax next year versus this year, would you expect Fairfax to be net good guide to 2018 EBITDA, despite the insurance recoveries? And what I mean by that is that, it seems you had to eat a couple of weeks of downtime, you've got deductible. I'm not totally sure but it doesn't feel like the recovery has fully covered both variable and fixed cost. Plus I think Fairfax should be running much better post the upgrade. So, wouldn't it be, at least, a few million dollar good guide next year?
- Brad Helgeson:
- It would absolutely. We would expect it would be a positive and you hit on the reason. I mean we've accelerated some work into this year. Of course we're not halfway through the replacements on the fabric baghouses, which we the plant went down, we're having a material positive impact on the plant's production. So, we feel actually it will actually -- as good as we felt about that project in a very long time we just need to get it back up and running now.
- Stephen Jones:
- Yes.
- Patrick Tyler Brown:
- Okay. Is Fairfax a special waste plant?
- Stephen Jones:
- Yes.
- Patrick Tyler Brown:
- Do the insurance--
- Stephen Jones:
- Yes, if you look at our special waste results, we grew at 10% this quarter. It would've been better -- it would've been higher if Fairfax was online.
- Patrick Tyler Brown:
- Okay. Do the insurance companies contemplate that?
- Stephen Jones:
- We're still working on that. That's a very good question; we're -- of course, that's our position. And we've talked to them about it, so we'll see how that plays out, but that's a good question. And I don't know if you have something more to add to that.
- Brad Helgeson:
- Well, just that -- and our parts of two finally, but certainly it's our position that the recovery should cover all of the lost revenue streams. Though the way the insurance company looks at it is based on historical results. So, we're not going to get is the lost opportunity for growth.
- Stephen Jones:
- Yes. The kick-off that would've occurred, so I mean, that the discussions we're having with them now.
- Patrick Tyler Brown:
- Okay. All right. Thank you very much.
- Stephen Jones:
- Thanks Tyler.
- Operator:
- Your next question comes from the line of Barbara Noverini with Morningstar. Your line is open.
- Barbara Noverini:
- Hey, good morning everybody.
- Stephen Jones:
- Good morning.
- Barbara Noverini:
- So, you mentioned the small acquisition in the pharma waste that you made in the quarter. How much of your Environmental Services business comes from servicing pharma waste at the moment? And maybe, can you talk a little bit about the types of assets you're looking for when identifying or contemplating further M&A in the pharma waste space?
- Stephen Jones:
- Yes, it's pretty small at this point, Barbara, in kind of the grand scheme of revenue, so both in Covanta's Environment Solutions and the overall company, obviously. This area is of the lot of interest to it. The tipping fees are high and there's a new scene, a number of governors talk about the opioid crisis and so that in the pharma space, a lot of it is a drug take back activities where there's DEA-control substances and you're just seeing more and more interest in that space just to try to get more of a grip on what happens with pharmaceuticals that are out stack or trial drugs, things like that. So, this will be -- with this acquisition, that's our second, let's call it a DEA reverse distribution, the center and they got special -- you need special permits to things like that. Again because of -- particularly, because of the interest in the opioid epidemic, I think you're going to see more regulation coming down the pike from the government requiring more control over what happens to these drugs after they get into commerce. And these two DEA reverse distribution centers we have for taking that area. So, we're pretty excited about it. And we'll continue to look to build that out as time goes on here. And so we're looking for those types of assets that have certain DEA licenses.
- Barbara Noverini:
- Got you. Thanks. That's interesting. Thanks.
- Stephen Jones:
- Sure.
- Operator:
- There are no further questions. I will turn the call back over to Mr. Steve Jones for closing remark.
- Stephen Jones:
- Listen, we appreciate everybody's participation today. We know you're busy, so thanks for taking the time to listen to our discussion about the company and have a good rest of the day and the weekend. Thanks so much.
- Operator:
- This concludes today's conference call. You may now disconnect.
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