Covanta Holding Corporation
Q1 2013 Earnings Call Transcript

Published:

  • Operator:
    Good morning, everyone, and welcome to the Covanta Holding Corporation's First Quarter 2013 Financial Results Conference Call and Webcast. This call is being taped, and a replay will be available to listen to later this morning. For the replay, please call (877) 344-7529 and use the replay conference ID number 10027173. The webcast will also be archived on www.covantaenergy.com and can be replayed or downloaded as an MP3 file. At this time, for opening remarks and introductions, I'd like to turn the call over to Alan Katz, Covanta's Vice President of Investor Relations. Please go ahead.
  • Alan Katz:
    Thank you, Emily, and good morning. Welcome to Covanta's First Quarter 2013 Conference Call. Before we begin the call, I'd like to note that we recently published our second online annual report. This site has some great information, videos, links and data within it. Whether you're just becoming familiar with the company or you've been following us for a while, I'm sure that you'll find it interesting. Moving on, joining me on the call today will be Tony Orlando, our President and CEO; Sanjiv Khattri, our CFO; Tom Bucks, our Chief Accounting Officer; and Brad Helgeson, our Treasurer, to provide an operational and business update, review our financial results and then take your questions. During their prepared remarks, Tony and Sanjiv 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 the website. These prepared remarks should be listened to in conjunction with these slides. Before I get into the Safe Harbor, I'd like to remind everyone that we hold regular plant tours every quarter. You can sign up for these on the Covanta IR website or by e-mailing ir@covantaenergy.com. Now on the onto the Safe Harbor. 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, April 18, 2013. 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, reconciliation to the most directly comparable GAAP measures and management's reasons for presenting such information is set forth in the press release that was issued last night, as well as the slides posted on our website. Because these measures are not calculated in accordance with U.S. GAAP, they should not be considered in isolation from our financial statements, prepared in accordance with GAAP. It should also be noted that our computations of free cash flow, adjusted EBITDA and adjusted EPS may differ from similarly titled computations used by other companies. With that, I'd like to now turn our call over to our President and CEO, Tony Orlando. Tony?
  • Anthony J. Orlando:
    Thanks, Alan, and good morning, everyone. Let's begin with a quick summary of the quarter. For those of you using the web deck, please turn to Slide 3. In the first quarter, we expressed both positive and negative factors. Working in our favor, energy prices improved. In the full year, natural gas price is now expected to be about $4 on a full year basis. As you know, that means higher revenue for the electricity and steam we sell. Operationally, however, it was a challenging quarter. We had 3 unscheduled maintenance outages, 2 relating to turbine generators and one to some equipment that froze during a cold snap. We also had 2 turbine generators down for scheduled maintenance that took longer to complete than we had anticipated. These unplanned events caused higher-than-expected expense as well as revenue reduction related to the extended downtime. This reduced our first quarter adjusted EBITDA by about $9 million. The remaining year-over-year decline was almost entirely related to timing of scheduled maintenance. We always do a lot of maintenance in the first quarter, but this year, the percentage of our planned work was even higher than last year. This maintenance timing will reverse in the second half of the year. Sanjiv will discuss this in more detail. So what's different in our full year outlook now as compared to the beginning of the year when we initially issued guidance? Nothing is fundamentally different, and there are only 2 meaningful changes, one negative and one positive. The unplanned and extended maintenance in Q1 and the improved energy prices. The higher energy prices don't completely offset the unplanned maintenance, but of course, we're working to find other improvements. And our overall business continues to be very stable. And therefore, I can say with confidence that we're still on track to achieve our full year guidance metrics. Furthermore, we demonstrated our confidence in the business with our capital return actions. We bought back 24 million in stock. And in early March, we raised our dividend payments by 10% and we approved an increase to our stock repurchase authorization. Now let's turn to the business outlook. We'll start with waste on Slide 4. Our view of the waste market is unchanged, it remains very competitive. Fortunately, about 80% of our 2013 revenue from waste will be generated from fixed price contracts, and most of those contracts extend well beyond this year, which gives us a significant amount of long-term visibility. Looking at our total waste revenue, we have a lot going on with contract transitions. Sanjiv will take you through those details shortly. Tip fees were flat in the quarter. Special waste was a bright spot. It was up double digits year-over-year. The growth in special waste, plus the benefit of contract escalations, was almost entirely offset by lower spot prices and contract transitions. This is in line with our expectations, and we still anticipate total waste revenue to be approximately flat for the year. For your convenience, we've repeated all the key factors regarding our full year waste outlook on this slide, but I'm not going to review them again now. Moving onto the energy portfolio, please turn to Slide 5. As mentioned earlier, natural gas and electricity markets improved, primarily on increased demand due to the cold weather. Full year average natural gas is now forecast to be $4 versus the $3.50 price that we had discussed when we initially issued guidance. As a reminder, our rule of thumb is that for every $1 move in natural gas prices, we'll see a $5 million to $10 annualized impact to our 2013 adjusted EBITDA. Using this rule of thumb, we expect a $0.50 move in natural gas prices to result in a $2.5 million to $5 million benefit. We expect our energy from waste production to be approximately 5.4 million megawatt hours in 2013 and pricing to be about flat compared with 2012, given the hedged and contracted nature of our portfolio. Remember that we had an increase in energy share compared with 2012 due to contract transitions, but this is partially offset by lower waste revenue and increased expense associated with those same contract transitions. Let's move on to metals on Slide 6. Year-over-year, net metal revenue declined by $4 million. This was primarily driven by a 15% decline in ferrous market prices versus Q1 2012. We also had a slight reduction in ferrous tons recovered. This decline in volume was driven by 2 things
  • Sanjiv Khattri:
    Thanks, Tony. Good morning, everybody, and good afternoon to those of you calling in from Europe. Given how succinct Tony was in his commentary, I'm under pressure to not be the one to make this too long a call. And for those of you who know me, you know how difficult it is for me to be succinct. I will say that I'm looking forward to seeing many of you at the Waste Expo in about a month. I believe the dates are May 20 to 23. It was a great event last year. And this year, the event will be just as good. In addition, this year we will have a booth and we'd love to have you stop by so you can see and meet the Covanta 4Recovery team, our special waste and commercial waste procurement group in action. We have a packed schedule, but Brad, Alan and I will be at the stand a fair amount and we look forward to seeing you there. We will also be doing a couple of sell side events. Before discussing the numbers, I wanted to spend a minute on some usual housekeeping. As a reminder, we've included on Slide 21 and 22, our free cash flow walk, which shows you how we get from a relatively low book earnings to our high free cash flow, always a good reminder for all. We also have our detailed P&L on Slide 19, as well as the usual non-GAAP reconciliations. In February, when we detailed P&L, we reviewed fiscal 2012 earnings, we included a bunch of charts on waste contract transitions, energy outlook, debt service impact and project debt that we have not included this time, but they continue to serve as good reference materials. We are happy to take any questions on any of these, of course. Now let's get into some details. I'm starting on Slide 9, which lays out our Q1 2013 financial highlights. As Tony described, this quarter had both ups and downs. On the upside, energy markets have started moving in our favor and metal pricing has stabilized a bit. Unfortunately, there are some downs, too. We had some unplanned and extended outages in Q1, which, as you can see on Slide 9, impacted all of our financial metrics. I'll get into a bit more detail about the impact of the outages over the next few slides. I wanted to start with our maintenance activity. I thought it would be helpful to share with you what typically happens and what actually happened in Q1. Starting on Slide 10, we provided a bit more commentary on the impact. Our maintenance spend is very seasonal, with most of our spend occurring in the first half of the year. In fact, for your benefit, we've included a chart on Slide 20, showing our historical maintenance expense by quarter, which you may also remember from our Q4 earnings call. It shows the quarterly break up of our maintenance expense as a percentage of total annual maintenance spend, especially highlighting how much maintenance we do in the first 2 quarters of the year. I can safely say that, that this effect will be even more pronounced this year, and the amount of maintenance expense in the first half of this year will be the highest percentage of our maintenance expense in the first 2 quarters of the year compared with the past 3 years. In fact, for 2013, the first quarter was the highest it's been over this timeframe. And on a year-over-year basis, the same will be true for Q2. This typical maintenance schedule generally allows us to keep our facilities running throughout the hot summer months where energy prices are typically the highest. As Tony mentioned during the his remarks, outages impact both the expense and the revenue lines. We usually conduct boiler outages twice a year. When a boiler is down for an outage, we are not processing as much waste, recovering as much metals or producing as much electricity. All of our facilities have more than one boiler, so we are usually able to run a partial role and produce some energy during boiler outages, as well as continue processing some waste. A turbine outage is a larger expense and, for tip fee facilities, has a greater impact on the revenue line as it means we are generally not producing energy. Unlike the annual or semiannual boiler maintenance schedule, major turbine maintenance occurs only once every 5-plus years. We can sometimes continue to process waste by bypassing the steam that we produce, but in other cases, we have to shut the boilers down as we don't have bypass capability, thereby impacting all 3 of our revenue lines. Of course, we schedule our boiler outages to coincide with the turbine outage in this case, but the turbine outages usually take longer than the boiler outage, and sometimes, they're not planned. That's exactly what happened to us in the first quarter. We had 4 turbine outages, 2 of which were scheduled but went a bit longer than we expected, and 2 were unplanned. The fact that we planned 2 large turbine generator overall during Q1 is the primary reason our planned maintenance was higher this quarter. But of course, that will reverse in the second half of the year as we have much less planned maintenance. The portion that will not reverse is the unplanned maintenance relating to 2 of the turbines I just discussed. The impact to adjusted EBITDA was about $9 million. The majority of which, about $7 million, is revenue and hits waste, energy and metal revenue. The rest, or $2 million, is unplanned expense. We are working hard to offset this in other ways, and we also have the benefit of energy markets moving in our favor. It's also important to note that our outlook for total maintenance expense for the year is virtually unchanged from the start of the year. In addition, our maintenance CapEx outlook of $80 million to $90 million remains the same as the start of the year. In fact, the outlook in 2013 for both maintenance expense and maintenance CapEx is, give or take, in the range of the last couple of years. Like always, let's go through some now waterfalls now, starting with Slide 11 for revenues. Total revenue for the quarter was $373 million, down by about $19 million compared with Q1 of 2012. The energy markets worked in our favor, and we saw about a $4 million pickup in revenues from that year-over-year price improvement. Organic Growth and Other was up primarily on special waste, contract escalations and year-over-year benefit of our Honolulu expansion unit coming online. There were some offsets, including lower construction revenues from completion of the Honolulu project. As a quick reminder, construction has minimal impact on the bottom line, as the profit is modest in this activity. We also had year-over-year impact of lower metal pricing. We've recently heard from many of you asking if the HMS #1 has moved up since our Q4 call. As you've seen, the HMS pricing that we just discussed was flat versus the time of the Q4 call. It's important to remember that we use the HMS index pricing provided by the AMM for our business. Other indices may not move in line with what you are seeing in that market. Before I move onto the adjusted EBITDA bridge, I wanted to spend a minute more, if I could, specifically discussing our waste and services revenue. In total, this line item was $231 million compared with $238 million in Q1 of 2012, a year-over-year decline of $7 million, or about 3%, as a result of primarily 3 factors. First, half of the reduction relates to lowered debt service revenue, we talked about this many times in the past. In the Q4 earnings deck, we provided a detailed schedule of how debt service impacts the P&L over the next 5 years. As a reminder, the impact on revenue for full year 2013 is $16 million. Second, in this quarter, we had the year-over-year impact of 2 contract transitions from service fee to tip fee, both are Essex and Stanislaus facilities. As we discussed some time ago, these contract transitions will reduce waste revenue and increase both energy revenue and cost. In the end, that will lead to a net benefit in both revenue and adjusted EBITDA. Third, our revenue during the past quarter were impacted by the scheduled and unscheduled maintenance downtime that we just discussed. Additionally, I should also note that the benefit of contract escalation and special waste growth was offset by a soft spot market and above market contracts transitioning to market. Combined, this affect -- resulted in flat pricing to tip fees. You already heard Tony's take on that. Moving onto Slide 12, adjusted EBITDA was down $16 million year-over-year to $58 million. As Tony noted, this was primarily driven by the $9 million impact of the scheduled and unscheduled outages, with the remainder of the impact being maintenance timing, which will reverse in the second half of the year. The benefits from our organic growth initiatives, including the recent Delaware Valley acquisition, were offset by the timing of scheduled maintenance, the lower spot waste price and contract transitions, including the lower debt service revenue. We realize the benefit of higher energy pricing, but offsetting this was the decline in year-over-year metal market pricing. We're making steady progress on our organic growth initiatives, especially on metals and special waste. These initiatives will be the foundation to our small G focus. As I discussed in my summary, the benefit of these initiatives will be weighted towards the back half of this year, with the full year impact realized in 2014 and impact -- and beyond, excuse me. Turning to Slide 13, our Q1 free cash flow was $25 million, $52 million lower than in Q1 2012. And you can see from the waterfall, the year-over-year decline was primarily due to working capital, the majority of which is related to construction. Free cash flow was also impacted by increased maintenance CapEx and the impact of lower adjusted EBITDA. I will not repeat my prior comment -- quarter commentary on the lumpiness of construction-related working capital. But suffice it to say, construction working capital plays a huge role in how our cash flow looks quarter-to-quarter. We had a significant use of cash for our Durham-York project in Q1, and expect the same in Q2, which is already our seasonably low quarter for cash flow. This should all reverse in Q3. Now turning to Slide 14. Our adjusted EPS is down $0.12 compared with Q1 last year. In addition to the operating factors discussed earlier, adjusted EPS is also impacted by the depreciation associated with the Delaware Valley investment that we made. We also had the impact of higher interest expense due to the refinancing that we completed last year. Now let's turn to Slide 15 to go through our capital return activities for the quarter. It was another strong quarter. In March, we announced a 10% increase to our quarterly cash dividend to $0.165 a quarter, or $0.66 per share on an annual basis. This works out to about a 3.3% yield based on the quarter end stock price. Our payout ratio is about 1/3 of our free cash flow, which we think represents a balanced approach between a robust current payout while leaving flexibility to capitalize on opportunities and the potential for future growth in this dividend. As I've mentioned in the past, we see this dividend as being very meaningful now and having room for growth, especially as we aim to grow our free cash flow. During the quarter, we also purchased -- repurchased, excuse me, $24 million of stock. This reduced our share count by 1.2 million shares to approximately 131 million at quarter end. We have bought back 17.5% since we started the buyback program less than 3 years ago. If you look at our run rate over the past last few quarters, it's pretty impressive. In summary, I can say that our capital return policy remains unchanged. We plan on using our cash to grow the business, investing in high return projects. We have a strong stable dividend, which we hope to grow over time. And absent large growth investments, we will continue to buy back stock with our strong free cash flow. This is important for you to remember as you evaluate the many options our business enjoys. Now, moving on to Slide 16. let's take a quick look at our balance sheet. Our balance sheet remains strong and we have plenty of liquidity. We had a net use of bottom line cash this quarter, given the lower adjusted EBITDA, the buyback amount and our spend on the Durham-York project. We look at these flows in the context of the full year and the seasonality of our business. We completed a small capital markets transaction this quarter. Taking advantage of strong loan market demand, we were able to reprice our term loan by 50 basis points. This should be mean about $1.5 million in annual savings, assuming today's LIBOR rates. A small example of how our branch treasury team is always looking for opportunistic ways to add value. I also wanted to let you know that this quarter, we optionally closed out on our defined benefit pension obligation, which total approximately $100 million. This impacted GAAP results favorably by $6 million in Q1, but we decided not to include it in any our guidance metrics. More importantly, we have no further cash contributions to make to this plan. We've been averaging about $5 million, give or take, for the last several years. And it means that we will have no more pension-related exposure going forward on the margin, resulting in an even stronger balance sheet. Before I wrap up, I'll quickly talk about where we stand on guidance and how the second quarter is shaping up. I'm on Slide 17. For the second quarter, adjusted EBITDA will be meaningfully lower than in previous years. Again, as discussed earlier, our 2013 maintenance spend is more weighted towards the first half of the year. In addition, the organic growth initiatives benefit the second half earnings much more. For the full year, we are looking at another year of strong consistent free cash flow. However, free cash flow will be down meaningfully in Q2 due to the timing of construction working capital. As a result, year-over-year free cash flow for the quarter will be down, possibly even negative. However, it will quickly reverse itself, as Q3 is looking to be a very strong free cash flow quarter. This is all due to construction activity. Our business, at its very core, generates very solid free cash day in and day out. And by year end, I'm confident we will be within our guidance ranges for all of our metrics, including free cash flow. Lastly, as we did this quarter, we will see the full impact of the 2012 corporate debt refinancing and the interest and depreciation from the Delaware Valley acquisition. As a result, adjusted EPS will decline again in the second quarter compared to Q1 of 2012, though driven by factors other than the underlying operating performance. Speaking of adjusted EPS, a quick comment on equity income. Our equity income line moved around quite a bit over the past year due to China equity swap that we completed last year in Q2, which I discussed then. As a result, our equity income will be down quite a bit on a year-over-year basis in Q2, but will normalize for the remainder of the year. Now, the question you may ask is, the first quarter was down year-over-year, I'm now telling you that the second quarter will also be down year-over-year, yet we just reaffirmed our full year guidance, delivering growth in adjusted EBITDA to between $500 million and $530 million versus 2012 actuals of $492 million? What gives, Covanta? Let me try to summarize why we are so confident. I wanted to flag 4 major reasons in this first half, second half assessment. First, special waste continues to ramp-up year-over-year and sequentially; second, a big chunk of the metals capacity buildup is in the back half of the year; third, energy prices have moved in our favor; and, fourth and most of all, the massive seasonality in maintenance spending this year versus last year will help us in the second half. There are, of course, other factors but these are the 4 major items that will drive the first half, second half difference. I know I missed my goal of being succinct, but before we take Q&A, I wanted to give you a bit more color about how I'm feeling about the rest of the year and our operations as a whole. Tony and I discussed that a large portion of our revenue and profits are weighted towards the back half of the year. You'll see that benefit play out in Q3 and Q4, and I hope you will be very pleased with what these quarters bring. This was not a great quarter for us but fundamentally, nothing is different for our medium and longer-term outlook. You still see growth opportunities and on that note, we still expect growth investments unchanged at $75 million to $100 million for the year. As many of you heard, when we are on the road, Alan and I try to visit our facilities. We've seen some great facilities all around the country and one of the things that I'm really excited about is the innovative projects that we've seen recently when out in the field. This includes everything from process improvement, to new systems that we are putting in place, to people thinking outside of the box for new revenue streams. Some of these are small ideas and some are more meaningful, but they are all have the same end goal in mind
  • Operator:
    [Operator Instructions] Your first question will come from Dan Mannes of Avondale Partners.
  • Daniel J. Mannes:
    So real quick, just -- if you can walk us through the unplanned maintenance. Number one, can you maybe give us a little bit more color on the scale of facilities that were impacted; two, the time in the quarter; and three, does this have any impact on sort of your tone on the second quarter, because I'm just wondering if it happened late enough in the quarter and are there any flows or impacts?
  • Anthony J. Orlando:
    Okay, so sure I'll take that question, Dan. This is Tony. I think that to some extent, we had a confluence of events that were unrelated and so it's a little bit of a fluke. Three of the events were at large plants. Dade, Essex and SEMASS. So you know those are all large facilities. Let me take them one at a time. The first is actually related to a piece of equipment that froze. So that's certainly pretty unusual. And in that case, we're going to be making some modifications to the equipment so it doesn't happen again. So that one is pretty straightforward. The other 2 big ones, the SEMASS and Dade, were both scheduled turbine generator overhauls and both ended up taking longer than we anticipated for different reasons. I'll cite one of them because I think it gives a pretty clear example of what happened. We were actually -- the equipment, which is a turbine which is the steam side, and the generator which is the electricity side, the generator rotor was actually being completely rewound. And so the way that's done is it's pulled out, it's shipped to a specialty vendor shop, they rewind it and send it back to the plant. What happened is they rewound it, conducted some tests, which actually gets done at a second shop, and the test revealed the rewinding was not done properly. It had to go back to the shop to get rewound before it could come back to be reinstalled in the unit. So that's a fluke, it shouldn't have happened this time and we certainly don't expect it to happen again. But essentially, what happened is it doubled our downtime because the work had to be done twice. And so that was a pretty significant impact. To a lesser degree, we had some similar timing issues at one of the other turbine outages up in SEMASS. All 3 of those units were back online before the end of the quarter, so no hangover into the second quarter. The other 2 turbine generators that were down for unplanned maintenance, we had an unplanned event and actually, what we realized was when we saw this piece of equipment, we decided we needed to go check another equipment that was of the same manufacturer and the same vintage. And sure enough, we had the same issue there. So we took both units down. Those 2 units are actually still down, turbine generators, but given the contract structure that we have at those facilities, we don't expect any significant financial impact into the second quarter. So largely, we think it's behind us in the first quarter, maybe with some very small impact in the second quarter. And again, I think the key point here is that we don't think this is, in any way, indicative of a trend. It was a bit of a fluke, the way the timing just happened in the first quarter.
  • Daniel J. Mannes:
    Okay. And then one other quick question and maybe this is just a little bit premature. I mean, we've seen natural gas prices pick up a bit. Obviously, the outlook for power feels a little bit better now than it has probably for the past, I don't know, 6, 7 quarters. Can you maybe remind us a little bit on your hedging policy and how you think about that for the balance of this year and when you start thinking about hedging out even some of your exposure next year?
  • Anthony J. Orlando:
    Sure. Very simplistically, we look at our hedging, we try to do it systematically. Of course, we're only hedging our own output, we're not doing anything to try to guess what's going on in the market, but we simply want to reduce our volatility. We want to reduce the volatility the most in the near term and we look at it kind of as a cone going 3 years out. So we've got the least amount of volatility 1 year out and we actually do it by quarter, so it's not even an annual, it's each quarter we look at it. And as we get further and further away from the present time, we're willing to accept more and more volatility. And so the practical aspect of what happens then is when we enter the year, such as we entered 2013, we're basically done with our 2013 hedges. If we see increased volatility or dramatic increases in prices, we might do some more hedging in the current year but we typically don't. So what we're doing in 2013 is we're now placing hedges for 2014 and to a lesser degree, 2015. And we'll continue to do that very systematically throughout this year so that when we get to the beginning of 2014, we'll look to have the same volatility that we entered 2013 with.
  • Daniel J. Mannes:
    So it's fair to say that you'd actually already started to move forward a little bit more on '14 and '15 but that's necessarily influenced by where pricing is now?
  • Anthony J. Orlando:
    Correct. Well, there is some influence, right? I mean, to the -- because we're looking at volatility on a dollar basis, so if for example, there's a large run up in price, we would end up hedging more megawatts because by definition, with a higher price, you've got more dollar volatility, right? So there is some influence of pricing. And if you remember, in the last call, we gave you a chart that showed exactly what was hedged. So you can see, there was a little strip hedge for 2014 already when we gave you the last call. Since then, we've hedged another a couple hundred thousand megawatts. And probably before the next call, we'll have hedged another couple hundred thousand megawatts. So we'll just kind of keep layering them on as we get closer and closer to keep shrinking that volatility down.
  • Sanjiv Khattri:
    Longer term of course, Dan, we obviously have growing exposure both as the result of additional energy revenue that we pick up and also, the fact that more of our contracts come offline. And then, Tony, if you remember, did a great job last time taking you through that chart that lays out how both the total revenue growth and also the total capacity growth and also how we become more exposed. So it is all very consistent with that.
  • Anthony J. Orlando:
    And just obviously, by hedging -- the hedges that we've done this year are obviously at a higher price than the hedges we did last year, right? I mean, just because that's where the market is. But that's what we'll do. We'll just keep moving down that program methodically.
  • Operator:
    Our next question is from Hamzah Mazari of CrΓ©dit Suisse.
  • Hamzah Mazari:
    You said you expect a decision on Merseyside soon. If you do win that project, could you maybe give us a sense of how that impacts your capital allocation strategy over the next few years, and maybe what the cash commitment, et cetera, would look like? I realize there's a gradual ramp, but maybe give us a sense of that?
  • Anthony J. Orlando:
    Yes, okay. Well, let me start with kind of what the state of play is. The Merseyside authority publicly announced that they're meeting today to consider the appointment of a preferred bidder. So first, we don't know what they'll decide at their meeting or even if they'll make a decision. But they are having a meeting today, at least, that's what we understand. And we hope that they make a decision. And again, as I said earlier, we really hope that they pick us but it is not in our control. We're waiting for their decision. And if they do pick us as preferred bidder, there's still quite a bit of work ahead. We've got to finish a bunch of contracts and work to close the financing and begin construction. So that's kind of the state of play. So it does sound like we're going to know soon. And again, hopefully, that's true. I do think that we put in a strong bid and I know if they pick us, we'll do a great job serving them and creating value for our shareholders. With respect to capital allocation, a couple of things. First up, I hope our actions speak louder than words. And we're going to look to when we said that our best use of capital is to invest in strategic and high return projects and we hope we have the opportunity to do that. But if those projects don't materialize, well then, we'll have more capital to return to shareholders. With respect to the specific project, a couple of things to note. We do have quite a bit of cash overseas. Do you know how much is it, Sanjiv?
  • Sanjiv Khattri:
    $150 million.
  • Anthony J. Orlando:
    So we have about $150 million already overseas, quite frankly waiting for an opportunity just like this. And the project, as you said, does stretch out over 3 years, so the equity does kind of take several years to go in. In terms of what we ultimately finance and how much equity we'll take, maybe Sanjiv, you can probably better answer the expectations on how much equity we're going to require based on the current thinking on the financing.
  • Sanjiv Khattri:
    Yes. Very briefly, we've been very consistent. Growth is the best use of our capital. We have a nice dividend that we hope to grow. Obviously, the Board will decide that. And then, we had capital left that's being used for buying back stock, we've done that now. We've got a good structure. Brad and his team and the local U.K. team have done a good job, setting up a good structure. Still a lot of wood to chop if we win, to get to financial close but I expect to get 50% to 60% leverage on the project in terms of nice nonrecourse projects debt. And then Tony and the Board will have to make a decision on whether they sell down the equity or not and that will be driven by all the other things that's going on. And to the extent that we do sell down some of the equity, then the ask will be less. To the extent that we keep 100% of the equity then the parent will invest the remaining amount. But this is all premature right now. As Tony said, let's see what happens and then obviously, we will talk to you.
  • Hamzah Mazari:
    That's very helpful. And just a follow-up, maybe you could prioritize or give us a sense of how you're thinking about waste to energy markets outside the U.K. I know you're look at Dublin, there's been no real change there over the last 8 to 10 quarters. What's your view on China? Are there any other potential markets out there that are attractive or is this it?
  • Anthony J. Orlando:
    There are other markets. I would say, there's no question, the focus being the U.K., Ireland, China and Canada, to some extent. So there are some opportunities that we do see in Canada. China, we've had I think, a fair bit of success there with our investments, but we have intentionally kept our capital allocation there relatively modest. We do continue to see some opportunities to invest more in China, but they're going to be smaller because we're going in as minority partners and the size of the projects there are just smaller, given the lower tip fees than there would be on other parts of the world. And we do continue to keep an eye in other countries where we think that there is appropriate regulatory support and kind of the right rule of law. I mean for example, there are energy from waste projects moving forward in India, but that's not a market that we're pursuing at this time. We just don't think it makes sense for us. But there are other places in the world where energy from waste looks poised to start to grow and we're keeping our eye on that. I would, of course, caution you that just like the U.K., these market. It takes a long, long time to develop these projects. So to the extent we're looking at markets that might be poised to grow, you're talking 5 years out.
  • Operator:
    Our next question comes from Gregg Orrill of Barclays.
  • Gregg Orrill:
    I was wondering if you could talk a little bit more about any other ways you're managing the business around having more EBITDA in the back half of the year, rather than the front half? Are there any particular issues that arise as a result of that seasonality or is that kind of, I guess, part of the plan all along that just the second half would be stronger?
  • Sanjiv Khattri:
    It's part of the plan all along. Let me -- Tony has been very clear to us that we are not going to run this business for quarterly numbers. We're going to run this business for what's right for the business and if it makes sense to do certain expenses in a certain time, so be it. Clearly, we were being very transparent with you, Gregg on -- that some of the spend we did have this quarter was unexpected, so we are obviously not happy with that. But in terms of the chunkiness and how it works, it's unchanged. If you look at what happened in 2012, 2011, it's all following the same pattern. It's slightly more this year for the reasons I brought up, although what year it's going to ramp-up. So right now, you have this flurry of activity going on. People are working really hard. The benefit of that will show up later in the year and next year. So it's all part of the greater plan. Did we want to get $9 million of bad news? No. It was already a tight quarter and that's why things didn't play out. And a good example of running the business properly is the maintenance timing issue. We had -- the turbine fell down, the team decided certain -- his team decided, you know what? let's also fix the boiler at the same time, it's the right time to do it. So again, making decisions, long term, that are right for the business. So all good and that's why we feel good about the whole year.
  • Anthony J. Orlando:
    I would -- just maybe to add one of the reasons that we have -- the biggest reason we have the seasonality that we do for maintenance is from the perspective of our customers to maximize the profitability of the plant. Energy prices are the lowest in a season that we're conducting the waste or the maintenance overhaul and also, waste generation is the lowest. So we try to look at what's the needs of customers, how do we optimize the use of the plant. And the key there for us, frankly, is to make sure the plants are running full load when prices are highest and waste deliveries are highest. And so to suit those needs, we always do our maintenance activity most in the first half of the year. And predominantly, typically, a lot of it is February, March, April, right? Because that's when the best time to do it is from a waste and power pricing.
  • Operator:
    [Operator Instructions] And our next question comes Michael Hoffman of Wunderlich Securities.
  • Michael E. Hoffman:
    Now I got to figure out how to get 4 questions in 2.
  • Sanjiv Khattri:
    Gregg gave you one question. I feel sorry, Gregg only asked one question but Michael, you are limited to 2.
  • Michael E. Hoffman:
    About the first half, second half, given that a lot of expenses might have been spread a little more balanced throughout the year if we had a normal maintenance, we're pulling forward expenses, that helps this, why the second has better profits, but how much is also that the boilers would be available more, you'd be up more and therefore, there's true operating leverage? And I'm trying to get a handle on, as I go into a '14 model, how much of that might I be able to keep as you sort of succeed in driving the boilers to higher capacity utilization?
  • Anthony J. Orlando:
    I think the bigger factor here really was the turbine generators in terms of the timing. Again, the plants that I mentioned that were down were SEMASS up in Massachusetts and Dade down in Florida. They're both very big plants and both with very significant turbine generator overhauls. That was a big driver for having more downtime planned in the first quarter. And then obviously, we had the unplanned. So we had record boiler availability in 3 of the last 4 years. Our plants are in great shape. Frankly, I'm confident that we can maintain the levels of boiler availability that we have, but I also don't see that you're going to get a whole lot higher than where we've been. I think last year, we were at 92%.
  • Sanjiv Khattri:
    Yes, 92.3%.
  • Anthony J. Orlando:
    So impressive boiler availability and our goal is to maintain the plants so that they keep it at that level, not just for this year and next year but for 5 and 10 and 20 years.
  • Sanjiv Khattri:
    And Michael, one step at a time. We are trying to -- I know you're trying to fill out your models. We've got a lot of work ahead of us for '13. We're focusing on small growth, big growth. Let's see how it all plays out and that will then all nicely segue into what happens in '14, '15 and beyond.
  • Michael E. Hoffman:
    And a hitchhike onto the first, this is a part B. Is some of that unplanned -- is there some of this Sandy hangover, things were down because of...
  • Anthony J. Orlando:
    No. That would've been a convenient excuse, but no, they're really -- it didn't have anything to do with Sandy. Our team worked really, really hard, especially at the Essex facility where we did have some fairly extensive flooding. Not to say that there might not be a little blip here or there related to Sandy, but the things that really drove this were completely unrelated.
  • Michael E. Hoffman:
    Then last modeling question. If we don't get any of the big G wins, and we got our fingers crossed, modeling for '14, we'd be taking out a fair amount construction revenues because Durham York will be nearly done and we just have to make sure we adjust for that, right?
  • Sanjiv Khattri:
    That's said but Durham York is currently slated to finish later in the year. So November, Q4 of next year is the target date to get the Durham York commissioned. Obviously, the revenue on construction stock's tapering off toward the end. But for the first couple of quarters, should be full systems go on the construction.
  • Anthony J. Orlando:
    Well, I mean, I think basically, the peak construction period, you're going to see this year. It will start to taper down. I think the bigger impact, again, while revenues is important, what we're really focused on is the cash that we generate, the EBITDA we generate. As Sanjiv has said, typically our construction projects have a lower margin so one of things we could also see is when that revenue has diminished and then goes away, is that our margins will pick up a little bit. And of course, at the end of construction, we'll also have the operation of that plant. So we'll pick up, albeit much smaller revenue than the construction, but we'll pick up some revenue on the operation of the plant as well.
  • Sanjiv Khattri:
    20-year O&M deal.
  • Michael E. Hoffman:
    Absolutely I get that. I just wanted to understand that. I would be adjusting for construction revenues if nothing is replacing it.
  • Anthony J. Orlando:
    Yes.
  • Operator:
    Our next question comes from Sanjay Shrestha of Lazard Capital Markets.
  • Sanjay Shrestha:
    A couple of questions. First on this Merseyside, right, was this a planned sort of meeting on their part or they sort of called a special meeting to -- or driven by something that happened and maybe in the interest that finally they are at a point to sort of move this thing forward rather than what we've seen in the past?
  • Anthony J. Orlando:
    Well as far as we know, and again, this is based on the agenda that they put forth publicly, it's a meeting really to address this subject. And that doesn't surprise us since the bids have been in for a while and it's time for them to pick a winner. So hopefully, that's what they do.
  • Sanjay Shrestha:
    In terms of this maintenance expense by the quarter then guys, right, so it's very kind of you guys to sort of give us a breakdown for '10, '11 and '12 here in one of your slides. So if we now were to look at this number in 2013, once '13 is over, is it fair to say that it would look like maybe Q1 and Q2 combined is sort of being more like this sort of 60%, 70% of the year, it would look more like 80% to 90% and therefore, the leverage that you're talking about in the second half of the year, is that the right way to think about it?
  • Sanjiv Khattri:
    Sanjay, we are careful not to give you specific numbers. I think I already went beyond by giving you some flavor of how the total number will play out on a year-over-year basis. But if Q1, Q2 are lumpy and this year, they are lumpier than last year, you need to figure out yourself what that means. But overall, I think we've already spoken enough.
  • Sanjay Shrestha:
    Fair enough. And can I squeeze in one more final question then, guys? Talking about the expansion opportunity and obviously, you guys have a pretty strong capital allocation which has worked out really well for you guys but when we talk about the acquisition opportunity for you guys, right, is there any brownfield opportunities, not so much the greenfield opportunity in the U.S. and broadly speaking, North America that one, you actually have value in looking at or is there any update that you guys can sort of share with us? Is there any sort of, on the brownfield side, that might be attractive and are you guys pursuing any of that?
  • Anthony J. Orlando:
    We've got a pretty good track record, I think, of executing acquisitions when we think they're strategic and at the right price. And we will continue to look for opportunities where that makes sense. Of course, we're not going to talk about any specific opportunities, but there are some potential areas in Europe, there's always some potential here. There's not much, quite frankly. We've a lot of acquisitions in the past and so there's really not many opportunities in the U.S., but we'll keep our eye out. And we'll look at everything from small opportunities where there might be 1 plant to a transfer station. Certainly, we have been acquiring transfer stations which we think makes sense for us as a way to pick up a little bit of EBITDA. But also, really, the driver there is that it helps the business, it helps us service our customers and it helps us ensure that we get a nice, steady stream of waste. So we're always looking for things that are strategic and at the right price.
  • Operator:
    Our next question comes from Barbara Noverini of Morningstar.
  • Barbara Noverini:
    So what are some of the factors that are driving the stronger special waste activity? I mean, looking at your SG&A spend, it looks like sales productivity might actually be improving a little bit since that's been relatively steady, so are you getting better at sourcing opportunity, is there more opportunity to be had? I mean, what gives you confidence that the strong activity will continue through the year? Because it looks like you kind of need it in order to meet that flat revenue guidance for waste that you put out.
  • Anthony J. Orlando:
    Yes, it is certainly an important component of our overall plan this year. We have ramped up our sales efforts in the special waste arena and as you said, our total SG&A is relatively flat. So we've been focusing our resources where we think they can have the biggest benefit. And so we have grown actually, fairly substantially, our salesforce in the special waste area. And I think that's paying off some dividends. As we said, we grew double digits this quarter and we had a really nice year last year, and we hope to continue growing that. We also think that the market is ripe for it. There's a lot of companies that want to find solutions that would be 0 waste to landfill. And we think we're uniquely positioned to be able to service the customers that want to do that with the size of the footprint that we have with environmentally friendly ways to manage that waste and create energy. So we think the combination of our assets and footprints and really, ramping up the sales effort to go after a market that we think is ripe.
  • Sanjiv Khattri:
    And Barbara, if I could add, I know you're new to the name and I'm really looking forward to spending some time with you at the expo. At the expo, we will have Covanta4Recovery, we'll have a booth, as I said and I'll make sure that you get to meet some of the players there. These are people who are actually driving the special waste growth. And I'm sure you will find them not only fascinating but very useful.
  • Barbara Noverini:
    Great. And just out of curiosity, do you -- have you witnessed or do you expect seasonality in special waste as well? I mean does that kind of track the seasonality in normal waste?
  • Anthony J. Orlando:
    There does tend to actually to be a little bit of seasonality in the special waste. Generally speaking, what -- the biggest quarter is the fourth quarter and is it always that way? Not necessarily but oftentimes, the companies will kind of like, say, we're going to do our cleanup, cleanout of what we have and get it out before the end of the year. So typically, in fact, I think I can safely say that's always the highest quarter. Q1 is actually usually one of the lower quarters. So the fact that it ramps up throughout the year is actually fairly typical.
  • Operator:
    Our next question Carter Driscoll of Ascendiant Capital Markets.
  • Carter W. Driscoll:
    I wanted to get back maybe to better understand the schedule you have for your turbine maintenance. Is it an orderly process where typically, you're doing 2 turbines a year or is there some level of that? And I want to talk maybe a little bit more specifically about the vendor instances where they didn't do the proper rewind, what type of recourse you may or may not have. Obviously, from a cost perspective, I understand there's probably some put back but is there any recourse from an operational perspective since it has such an impact on all 3 lines of business?
  • Anthony J. Orlando:
    Yes, the term we have, just maybe taking a step back and thinking about the size of our fleet of equipment, we have over 120 boilers and over 50 turbine generators. So we do have a very big fleet of equipment and in fact, I'd say that that's probably bigger than many utilities. So we have a lot of equipment that we're maintaining. As Sanjiv mentioned, the turbine generators typically are scheduled for maintenance. In 5-plus years, so maybe 6, 7 years would be atypical. So we're talking about maybe 7, 8, 9 turbine generators a year. Now, some of them are small, 10-megawatt machines and some of them are larger 50- or 60-megawatt machines. So obviously, the size of the machine is a big impact and what you're actually doing. So sometimes when you take them down there's -- you go in, you kind of check it out, you do relatively modest maintenance. In other times, it's much more significant. So we did have some significant work to do this time and they were 2 -- the 2 machines that I noted at SEMASS and Dade were very big machines. So we try as best as we can to kind of smooth that out so that we have a reasonable number each year. But at the end of the day, we have to do what makes sense for each particular plant and each particular machine. And so sometimes we have more in other than we would have in other years or in other quarters. With respect to the specific vendor, I'm sure our team is in discussions with and talking to the vendor but the -- I don't think it's going to be a significant factor one way or the other. I'm sure we'll try to find a reasonable way to make amends with that vendor.
  • Carter W. Driscoll:
    Just maybe just a quick follow-up, if I may. Shifting gears a little bit. Obviously, the Merseyside group meeting is certainly a positive. Can you maybe remind us what type of amount of the capitalized cost net and that bucket you've allocated to Europe is related to Merseyside if, for some reason, you weren't the winner of the project and what potential writeoff you might have? Not to put a pessimistic slam on it but just...
  • Sanjiv Khattri:
    Good question, you're read the queue, which is good. Basically, we obviously only have planning permission in the U.K. for this project and some of those expenses were capitalized. At this time, we have total capital related to development within the $50 million zip code, that's obviously Merseyside and a bunch of other projects. And we would be totally speculating at this time, Carter, what would happen to that to the extent that we lost. But clearly, we would have to revisit this project, we would have to revisit our strategy in the U.K., we would have to revisit why we lost and all those factors would weigh in to a decision we would make. Tom Bucks, our accounting guru would help us assess. And ultimately, we would -- probable that we would have to impair some of that asset. How and when would be pure speculation but it's important to note that there is a probable likelihood that we would have to write some of that off. Obviously, noncash.
  • Operator:
    And our next question is a follow up from Michael Hoffman of Wunderlich Securities.
  • Michael E. Hoffman:
    Sanjiv, you alluded to a possible leverage of Merseyside in the 50%, 60% level. So should we think about Dublin the same way?
  • Sanjiv Khattri:
    No. We are -- nothing to talk about on Dublin at this time. As Tony pointed out, we are making slow, steady progress. If we do have some update, we will share with you. But right now, I would be speculating on what structure in Dublin.
  • Operator:
    This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Orlando for any closing remarks.
  • Anthony J. Orlando:
    All right. Thanks, everybody. We will stay tuned on Merseyside and look forward to talking to you as soon as the next quarter.
  • Operator:
    The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.