Covanta Holding Corporation
Q3 2014 Earnings Call Transcript

Published: 23 Oct 2014

[Operator:]

Good morning, everyone. And welcome to Covanta Holding Corporation's Third Quarter 2014 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 10053540. Webcast as well as the transcript will also be archived on www.covanta.com. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) 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, and good morning. Welcome to Covanta's third quarter 2014 conference call. Joining me on the call today will be Tony Orlando, our President and CEO; and Brad Helgeson, our CFO, who will provide an operational and business update, review our financial results and then take your questions. During their prepared remarks, Tony 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 Web site. The prepared remarks should be listened to in conjunction with these slides. Now on to the Safe Harbor and other preliminary notes; the following discussion may contain forward-looking statements, our actual results may differ materially from these 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, October 23, 2014. 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 the definitions of our non-GAAP measures and how we use them, as well as limitations as to their usefulness for comparative purposes please see our press release which was issued last night and was furnished to the SEC on Form 8-K. With that, I'd like to now turn the call over to our President and CEO, Tony Orlando.

[Tony Orlando:]

Thanks Alan and good morning everyone. Please turn to Slide 3 in the Web deck. It was a good quarter especially with respect to our growth initiatives. We had record revenue for both metals and special waste. We started construction on the Dublin project and we increased our dividend to $1 per share annually. Our facilities are running well and the team continues to provide clients with high quality and reliable service. We expect to finish the year near the middle of our guidance ranges which we have not changed since we initially set them out at the beginning of the year. Now, let's go little deeper. Please turn to Slide 4. I will start by noting several waste contract extensions that we signed this quarter. The first is with the Town of Brookhaven, which delivers waste to our Hempstead Long Island facility. This is a 10-year contract accounting for approximately 20% of the facilities capacity. We also extended our contract with Essex County by seven years to 2022; this contract represents approximately 40% of the plants capacity. Lastly, we signed the agreement with our Indianapolis client to build the advance recycling center which I discussed last quarter. This agreement also extends the contract per waste disposable by 10 years to 2028. We will invest approximately $45 million to build the advance recycling center that will increase the city's recycling rate 5-fold. We are seeking permits for the recycling center now which we hope to receive early next year to support our desire to bring this facility online in 2016. Turning to our outlook for 2014 waste revenue. Nothing has changed in any meaningful way, but it's worth noting that we are executing our plan to continue growing special waste. This resulted in $18 million of special waste revenue this quarter another record for us. Looking ahead to next year. We intend to grow our special waste business at 10% or more plus we have our typical CPI based contract escalation and we are expecting flat to low growth in spot market pricing. I previously noted that we have some above market tip fee contracts that will be mark-to-market in 2014 and 2015. That includes the recently completed Essex and Boston contracts as well as the couple of large commercial waste contracts in New England. All in, it now looks like the mark-to-market on these contracts will adversely affect next year's waste revenue by about $15 million to $20 million. Now, let's move on to energy. Please turn to Slide 5. Energy revenues came in as expected for the quarter. Same-store energy revenues were up slightly year-over-year primarily because of increased steam demand related to a new contract at our Niagara facility. We satisfied this demand with the natural gas fired steam package boiler that we recently installed. Our full-year outlook for energy remains unchanged so not much else to report on that front. Let's move on to metal on Slide 6. We had another record quarter for both ferrous and non-ferrous revenue. That makes six quarters in a row that we have grown our metal revenue and set a new record. In total, this quarter's metal revenue was up 37% from last year. Clearly, we are reaping the benefit of our capital investment and increased management focus in this area. Recovery rates are the big driver with non-ferrous volume up over 50% and ferrous volume up almost 10%. We have also made some great strides in recovering a higher quality product and focusing on our efforts to secure better contracts. As a result, we are getting paid a higher percentage of the market index. Market prices during the third quarter were about 5% higher than last year. But, October pricing came down a bit, which we baked into our full year pricing assumptions. Please turn to Slide 7, and I will review maintenance spending. Q3 maintenance expense was higher year-over-year. We had mentioned this would be the case on our last two calls. This is just timing between quarters with more maintenance scheduled in the second half of this year compared with last year. Our annual maintenance programs are going well in particular the turbine generator outages, at both the major outages and the minor outages and inspection program are progressing even better than we had hoped as the equipment has proven to be in good condition with less need for repair work than we had estimated. As a result, we are trending towards the bottom end of our full year maintenance expense range. While this is nice, it's nothing out of the ordinary. Some years will be a little lower than our estimate and others will be a little higher. That's all it is, nothing that would change our fundamental long-term outlook. Let's move to slide 8, to discuss our growth projects. On September 19th, we announced that we have signed the project agreement and completed financing for the €500 million Dublin energy from waste facility. Construction has commenced and should take about three years to complete. We have gotten a lot of questions on this contract in this market. So I will spend a few minutes addressing those topics and highlighting why this is such an exciting opportunity for us. Brad will cover the financial aspects. So Dublin and the surrounding areas produced about 1 million tons of post recycle municipal solid waste annually most of which is being buried in local landfills or being shipped to energy from waste facilities in Continental Europe. Ireland must comply with the European Union Landfill Directive, which requires member states to reduce landfilling by 65% from 1995 levels. And Ireland has set an even more ambitious goal to completely move away from landfilling over the next 10 years. As part of their effort to accomplish this goal, Ireland has implemented a tax on landfill waste, which is currently €75 per ton. Great strides have been made to increase recycling, but with over 1 million tons remaining after recycling in the Dublin region, there is also a clear need for additional energy from waste capacity to locally and sustainably manage non-recycled waste. That's where our facility comes in. It will play a vital role in achieving the national waste policy objectives. Furthermore, we have a 45-year public, private partnership with our Dublin client. While similar in philosophy, the Dublin partnership is different than the contract structures we typically have in North America. This contract is a bit of a hybrid between the tip and the service fee structure. We are responsible for securing waste, selling the electricity, running the facility and paying the project debt, much like a tip fee structure. However, unlike our normal tip fee contract, the Dublin client will share in the upside waste revenue and they will provide financial support, if waste revenue falls below the base case. This arrangement aligns our interests, which I believe sets the foundation for an adoring and mutually beneficial partnership. In addition, the facility's central location and efficiency will put us in a strong competitive position to secure waste supply. I'm confident; we will fully utilize the plant's capacity. In fact, we are already in discussion with a number of potential customers. In terms of energy production, the facility will generate enough power for up to 80,000 homes. We will share 25% of the energy revenue with our client and over 50% of the electricity that we sell will qualify for preferential pricing under Ireland's renewable feed-in tariff. Again, we are really excited to have this construction underway for this important project. Let me also provide a quick update on two new contracts that will begin service soon. We nearly completed construction of the 500 ton per day Durham-York energy from waste facility in Canada. As a reminder, this facility is owned by our client, Covanta is building the facility under fixed price contract and we will operate it under typical 20-year service fee contract. I visited the job site earlier this month and I can say with confidence, this – anybody that sees this facility will be very, very impressed. We plan to begin converting waste to energy next month and while this is a little later than we had previously hoped, we are really looking forward for completing start-up and beginning commercial operation early next year. This will be a real showcase facility that could create additional growth opportunities in Canada. With respect to our New York City contract, everything is on target and we have now taken delivery of a significant amount of intermodal equipment including railcars, containers and barges. We are well-positioned to begin taking waste for the city's North Shore Marine Transfer station in the first quarter of 2015. We will start slowly, initially taking waste to our Delaware valley facility as well as a third-party landfill. The city will ramp-up volume over time and we'll begin deliveries to our Niagara facility when the rail yard is complete, which we expect to be next summer. During this ramp-up, we will proceed methodically, closely coordinating with the city and all of our subcontractors; our priority will be to ensure we get this 20-year contract off to a good start. I should also mention that as expected we have not received notice to proceed for the East 91st Street Marine Transfer station. People will often ask when that might happen. Of course, that's New York City's decision, so I cannot say with certainty. However, I can tell you the construction of the MTS is proceeding; still will probably be at least a year before the city would give us a go ahead after which it would be another year before we would begin operation. Turning to Slide 9, I will provide a quick summary before turning it over to Brad. As I said in my opening remarks things are going well. Operations, maintenance and our organic growth initiatives are all on track. We are also having another good year extending municipal client waste contracts. In the months and years ahead, I'm confident our team will continue to build upon our stellar track record extending these relationships which are at the heart of our business. With respect to our 2014 financial outlook, we expect this year's adjusted EBITDA and free cash flow will be near the middle of our guidance ranges. As it's often the case, we had a few things go for us and a few things against us. Brad will review the ups and downs. But from my perspective, they are all pretty minor in the scheme of things. Lastly, I'm very happy with the progress we made this year to create near term growth and enduring value. The cost savings initiative that we described in detail earlier this year remains on track and we still expect to achieve approximately $30 million in adjusted EBITDA benefits for 2015. We are confident in our long-term stability of the business and its cash flow as clearly demonstrated by our decision to increase our dividend to an annualized rate of $1 per share. And that leaves ample cash to continue investing in the business when we attractive and strategic opportunities. Dublin fits squarely in that category and I'm confident this investment will deliver meaningful value for decades after we complete construction. We are also very excited to be starting service in the coming months on the two major long-term operating contracts Durham and New York City. All of these efforts put us in a good position to deliver growth next year and in the years to come. Now, I will turn it over to Brad for his prepared remarks.

[Brad Helgeson:]

Thanks Tony. Good morning everyone. I will begin my review of our financial performance in the quarter with revenue on Slide 11. Revenue in the third quarter was $414 million down $11 million from $425 million in Q3 of last year. North America energy from waste revenue was up $9 million year-over-year on a same-store basis driven by a $4 million increase in energy revenue from higher generation and $7 million increase in recycle metal revenue from both higher volume and price. These improvements in metals revenue continue to be driven by our investments to enhance both the volume and quality of metal recovered. Waste and service revenues declined by $1 million on a same-store basis with overall waste pricing up about 1% year-over-year offset by a bit lower volume and a retroactive service fee adjustment. Contract transitions were a net negative $7 million year-over-year, which included a $4 million decline in debt service revenue and $3 million decline as a result of PPA expirations. Outside of North America, EfW operations construction revenue was lower by $18 million year-over-year, so that was a primary driver of the overall lower revenue. All other operations were up $5 million, primarily due to the New Jersey Transfer stations that we acquired at the end of last year and higher international revenue partially offset by lower biomass revenue. Moving on to Slide 12, adjusted EBITDA was $135 million in the quarter compared to $157 million in Q3 2013. In the North America EfW business, we saw a year-over-year decline of $4 million on a same-store basis with higher revenue that I just described more than offset by $13 million of higher operating expenses driven by heavier scheduled plant maintenance activity in the quarter as compared to last year and $7 million of one-time benefit that reduced expenses in Q3 of 2013 which we highlighted last year. Contract transitions in the North America EfW business negatively impacted adjusted EBITDA by $10 million in the quarter, this consisted of $6 million decline in debt service billings year-over-year, $3 million mark-to-market decline in energy pricing following PPA expirations and $1 million mark-to-market decline related to a major waste contract transition. Adjusted EBITDA from non-EfW operations declined by $9 million year-over-year which was primarily biomass and construction. A quick note on our biomass portfolio. Our two main plants continued to run well based out of (indiscernible) and NEPOOL, which was very lucrative earlier this year and (indiscernible) as well. However, the outlook for our five assets in California is uncertain. Three of our facilities have been economically dispatched offline for the past several years. And while the two have been operating profitably under long-term PPAs those agreements will be expiring at the end of this year and next year. Given the long-term outlook for the California facilities, we will be taking an accounting impairment in Q3 of $34 million. Turning to Slide 13, free cash flow was $104 million in the quarter compared to $162 million in the comparable period last year. In addition to the year-over-year difference in adjusted EBITDA free cash flow in the quarter was particularly impacted by the timing of construction working capital where we saw an inflow in Q3 2013 versus an outflow in this quarter. Other drivers were $7 million of additional maintenance CapEx year-over-year and $30 million benefit from operational working capital and other items including $9 million of distributions from the trust account that we acquired with the Delaware Valley facility lease buyout in late 2012. We will continue to receive distributions from those accounts through 2019. Turning to Slide 14, adjusted EPS was $0.26 in Q3 compared to $0.28 in the third quarter of 2013. Lower operating income year-over-year was partially offset by benefits from lower non-cash interest expense related to 3.25% cash convertible notes that we repaid last quarter and a lower effective tax rate in the quarter. Now, I will move on to our growth investments. Please turn to Slide 15, we invested $50 million in the quarter towards various growth initiatives including $14 million in organic growth projects, which included $6 million in the beginning stages of installation of the new emissions control system at our Essex facility, $7 million for our ongoing preparations for the New York City contract, $16 million in the Dublin project and $13 million for the acquisition of an industrial treatment storage and disposal facility or TSDF to support our continued efforts to expand our special waste business. This brings our total investments to $104 million year-to-date, looking ahead to the full year, we now expect to invest a total of $160 million to $190 million as we take delivery of the remaining equipment needed to commence the operations at the first marine transfer station under the New York City contract early next year. We continue work on the Essex facility upgrade and a spending ramp-up in Dublin with construction now underway. Turning to Slide 16, I will review some financial details in relation to our Dublin facility. Tony went through the contract and market and why this is a very exciting and highly strategic project for us, so I will focus on the numbers. We expect the total capital investment in the project will come to approximately €500 million which is an all in number including all development and financing cost. As previously announced, we planned to fund the project with a combination of €375 million of third party non-recourse project financing consisting of project debt and the convertible preferred investments and approximately €125 million of our own equity investments. We have outlined the components of the project financing package on this Slide 16, and also provided additional details on the commercial terms of the financing in an 8-K that we filed on September 19, so I won't repeat all that again here. However, anticipated equity investment in the project over €30 million has already been invested in development cost and pre-construction activities and the majority of the remaining investment will be funded from cash already held offshore. I believe raising approximately 75% of the capital at the project level is a right financing structure for Covanta as it will minimize the impact on our corporate balance sheet and our other capital allocation priorities. Given the relative state of the project financing market in Ireland as compared to the corporate capital market, there is no doubt that we could have financed the project less expensively on our balance sheet. But again, this was a trade-off of costs versus capital commitment. Beyond the commercial trade-offs we were thrilled with the broad based support that the financing package represents particularly from leading Irish financial institution. In addition, I believe that the strategic investment made by the infrastructure arm, the First Reserve which is one the world's leading and most experienced energy investors speaks to the attractiveness of the project. We expect the project to generate an IRR on our invested equity in the mid-teens and the €500 million of total investment to represent an all in multiple of less than 9x EBITDA. We should begin to see the financial impact of this project when it becomes operational in about three years or near the end of 2017. Turning to Slide 17, I will review our current debt structure which has had a couple of changes since the last quarter. First, we began funding the purchase of equipment for the New York City contract under our corporate equipment lease financing line. In terms of this financing are very attractive achieving 10 to 12 year tenures at an average cost of approximately 4%. You should continue to see the slight increase as we take delivery of additional equipment. You can also see that our international project debt increased this past quarter by just over $60 million. This was because the Dublin junior term loan was funded into escrow at closing. In terms of order of funding for the Dublin construction cost, our equity will be first money in followed by the convertible preferred, the junior debt then finally the senior debt, which is not expected to be utilized until 2016. From a credit standpoint, our net debt to adjusted EBITDA ratio stood at 4.2x at quarter end and we had $657 million of availability under our revolver. The net debt leverage ratio ticked up slightly from last quarter as we began to invest our offshore cash balances into the Dublin project thereby increasing our net debt. All else being equal, you will see this leverage metric rise modestly over the next few years as the Dublin project construction progresses. However, as I have discussed before, we make capital allocation of balance sheet decisions based on a long-term outlook not near term changes in any particular metric. And of course, our credit ratio has to look much different once the Dublin project is up and running and generating EBITDA and cash flow. Before concluding, I would like to take a minute to summarize where our results are tracking at this point of the year and also comment on our reaffirmation of our existing guidance ranges. First, I will address the fact that we choose not to narrow our guidance ranges that has been the company's historical practice in the third quarter. I want to be clear this is not something that should be read into from a business or results perspective. Instead we decided to change slightly how we manage guidance during the year. Going forward, we plan to set annual guidance once at the start of the year. We will continue to provide commentary and direction on expected results as the year progresses, if and when appropriate and we will reassess the guidance ranges if expected results move materially outside of the ranges. However, we no longer plan to narrow guidance ranges mid-year which is an exercise that we believe is largely wasteful as it directs too much focus on relatively small variations in short-term results that's not where we want to spend time. We are focused on our long-term earnings and cash flow generation. Over the past year, I believe that we have increased and clarified disclosure tremendously and by doing so have given investors a clearer line of sight to the business drivers that impact our results and to the extent that there are material developments in our business that are not already apparent in the regular disclosure, we will discuss those is necessary. Now on to our full-year outlook. As Tony described earlier, the business is performing well overall including both our core operations and the execution of our organic growth initiatives and we expect to finish the year near the middle of our guidance ranges. As it is usually the case in any given year certain aspects of the business have met or outperformed our initial expectations while others haven't. This year the areas where the business has exceeded expectations are clear. We expect another record for recycle metals revenue, energy prices were very strong in the early part of the year and our maintenance expense is tracking to come in near the low end of our initial expected range. However, a few items have offset these benefits this year. First, as we discussed on the first quarter call, the extreme winter weather that we experienced brought with it certain operating difficulties and higher fuel expense in addition to the higher energy prices. Second as Tony mentioned, the Durham-York project is taking a bit longer to complete as a result we expect higher construction cost to eat into the construction profit that we had originally anticipated for this year. Third, our new TARTECH ash mining joint venture has not yet met the performance that we assumed in establishing our guidance. Our overall track record on investments in metal recoveries is strong but this new and unique project has had some operational challenges. As a result of all this, net-net we expect to end up roughly in the middle of our guidance ranges. Looking forward, we feel great about how the business is positioned for next year and plan to discuss our specific outlook for 2015 on the fourth quarter earnings call in February. With that operator, we would like to open up the lines for Q&A.

[Operator:]

We will now begin the question-and-answer session. (Operator Instructions) As a reminder, please limit yourself to one question and one follow-up. At this time we will pause momentarily to assemble our roster. The first question comes from Dan Mannes of Avondale. Please go ahead.

[Dan Mannes:]

So first of all, I appreciate you guys giving us the color on the $15 million to $20 million headwind in terms of waste, as it relates to 2015. I was wondering maybe you could give us a little bit more color on any other puts and takes to 2015, obviously we know about the cost plan, we know about New York City. But maybe if you can just give us any directional thoughts also on other contract transitions, the biomass plants, the maintenance program et cetera that might help us out a little bit more.

[Tony Orlando:]

Good morning, Dan. This is Tony. I think certainly starting with the big picture as we said, it's our intent to grow next year both EBITDA and cash flow. I think we try to give you, in fact I know we tried to give you all of the big items, but let me maybe just recap those. The cost savings initiatives that you talked about which we noted it was $30 million, the New York City contract that's starting next year that will be going through a ramp-up, so it's not a full year benefit next year. And of course, we will have our typical initiatives to drive organic growth next year. Although, I will say the metal investments are winding down a bit. And then, really the big one is the tip fee contracts that we mentioned with the $15 million to $20 million number. Biomass is probably going to be a little bit of a headwind, but I don't think very significant. And then the big factor the (indiscernible) will be what happens with market prices for energy and metal. And those things will tend to move around a bit. But, I think we have given you enough information that you kind of take your own view on where market prices are going to go.

[Dan Mannes:]

All right. And then the second question is, you guys have given us a lot of color over time in terms of long-term view on your power prices and your open position. This is a good step as it relates to waste. But I'm wondering if you can maybe give us a longer term view of any other potential pitfalls or headwinds we might see on waste pricing on your tip fee plans post 2015?

[Tony Orlando:]

Sure. Look I think, energy market are – obviously, there is kind of a published numbers out there for kind of what people expect on the forwards look. It's not quite as direct on that and so there is not necessarily the market comparison that you can find in the forwards curves. But, big picture with this transition on these tip fee contracts behind us, we think that we're very close to market. Any given year, we will have some ups and downs. I think you know that we've got a contract that's going to work in our favor in 2016. But when you look at the waste in its big picture with this transition behind us next year, we think we are about market.

[Dan Mannes:]

Got it. Thanks a lot.

[Operator:]

The next question comes from Michael Hoffman of Stifel. Please go ahead.

[Michael Hoffman:]

Thank you very much for taking my questions and nice job on the cash flow this quarter. Special waste you now highlighted a revenue number in the quarter, could you tell us what the 1Q, 2Q and the year to dates, so we can understand what it means when you say 10% plus. So we get that kind of accurate in our model.

[Brad Helgeson:]

Yes. It's Brad. We could follow up offline with the quarterly number. I don't have that at my finger tips. But, what we said was that certainly we had about $65 million of special waste revenue last year. And for the full year, we would expect to grow that by at least 10%. So that gives you a sense for the overall growth in terms of this – how it breaks down by quarter, we will take that offline.

[Michael Hoffman:]

Great. And just unclear, 65 or 55?

[Brad Helgeson:]

65.

[Michael Hoffman:]

65, okay. And then with regards to New York City, I fully appreciate there is going to be a gradual ramp, I'm sure the city wants to make sure everything works well before they allow you to go full steam ahead. When do you think you are at the run rate of what the North Shore transfer station would contribute in the course of 2015?

[Tony Orlando:]

This is Tony, Michael.

[Michael Hoffman:]

Hi, Tony.

[Tony Orlando:]

I think we are going to be working closely with the city and as you can imagine there are a lot of different contractors, our key is to really kind of take it methodically. And I will say it's also – we are ready to go, but it's also a large part up to the city and how fast they want to – how fast they want to make the transition. So it's a little bit hard to predict. Again, we fully expect to start in the first quarter of next year and we will just have to see kind of how long it takes before we get up to full – kind of full throttle. The focus really next year is to make sure things go very, very smoothly.

[Michael Hoffman:]

Well, if you are sitting my seat, fourth quarter is that conservative way to look at that?

[Tony Orlando:]

I guess, that's you know, we are going to focus on – taking it a separate time with the city. And we – that's the focus, we are making sure it gets off to a good start, it's not kind of what number it is for the quarter next year.

[Brad Helgeson:]

And here Michael, as Tony mentioned, it's ultimately – it's up to the city.

[Michael Hoffman:]

Right. I get all that. I just trying to – I mean my senses like I think about it as a full benefit in 2016 and it's some partial in 2015 and don't want to get too ambitious too early.

[Tony Orlando:]

Okay. I think that's fair. Certainly by 2015, it should be a full benefit and how much we get next year. It's going to be something less than full.

[Michael Hoffman:]

Right. Okay. Fair enough. Thank you.

[Tony Orlando:]

Thanks.

[Operator:]

The next question comes from Scott Levine of Imperial Capital. Please go ahead.

[Scott Levine:]

Hi. Good morning guys.

[Tony Orlando:]

Good morning.

[Brad Helgeson:]

Good morning, Scott.

[Scott Levine:]

Maybe a little bit more color, the maintenance expense seems like its turning towards the lower end, but you did have a pretty material change in your program and philosophy on that program last year. Just hoping for a little bit more color with regard to whether your thought process around that is the same as it was when you made that change last year, do you feel like from a longer term perspective maybe we are looking at a lower maintenance expense going forward to sustain the plants, or any change in or longer term philosophy on the maintenance program?

[Tony Orlando:]

Sure. This is Tony. No change to the long-term philosophy. Our focus obviously, first and foremost is to maintain the plants in a good condition to provide great service for our clients. But in so doing that it also provides predictability in our cash flow for our shareholders. What we have done is, we have really looked out over a very long-period of time to think about the things that we need to maintain – whether that this year certainly a big focus was on turbine generators, but we have other equipment. Cooling systems, it's going to be one of our bigger focuses next year. So we got a very long-term plan in terms of what we are going to be doing for replacing those long lives components in the facility to ensure that the plants continue to perform as they have in the past, so really no change. And again, we kind of laid it out in terms of the numbers for this, we said, that's a good long-term run rate. But there will be pluses and minuses in any given year. There will probably also be mixes between capital and pure expense. We really look at maintenance as one big bucket. And our fundamental plans are the same as they were a year ago.

[Scott Levine:]

Got it. Thank you. And as a follow-up congratulations on closing the Dublin deal there and just wondering looking ahead, whether its acquisitions or other investments in new projects overseas et cetera. How should we think about the growth potential going forward, or does the increase you made in the dividends suggest maybe that there isn't as much opportunity visible over about the next year or two. I think you are focusing more on capital returns or is that overstating the prior year capital deployment?

[Tony Orlando:]

That's probably overstating it a bit. I think as we said, roughly – our dividend is roughly half of our free cash flow that will leave ample cash to invest where we see good opportunities. I think the Dublin is also a casing point where if we got a good project or a good opportunity you can finance a good opportunity as well. So I think we feel like we are in a good spot where we are returning a substantial portion in a predictable way to our shareholders with the dividend, but yet, leaving ourselves ample room to invest in the business if we see opportunities. And I think we have also shown in the past if we don't see good opportunities we will have the discipline to return that capital to shareholders. So I think that puts us in a good place. I would say with respect to kind of specific question, we don't currently have any development activity going on in Europe. Our focus of course, we are very, very early stages of the Dublin construction project. And our focus is executing that effectively. But, we will keep our eye open if there are strategic opportunities be they in North America or Europe.

[Scott Levine:]

Great. Thank you.

[Operator:]

The next question comes from Brendan Naeve of Levin Capital. Please go ahead.

[Brendan Naeve:]

Hey, guys.

[Tony Orlando:]

Hi, Brendan.

[Brendan Naeve:]

Thanks for taking my question. Congratulations on Dublin and as Michael said, the free cash flow in the quarter. Just as to reaffirm the dollar dividend and Tony just said it's on the 50% payout. And then just kind of adjacent to that, when you talk through the growth you feel comfortable next year and the years beyond with New York City cost cutting Fairfax, Dublin et cetera. Should we expect the dividend to grow as your free cash flow grows with those growth drivers, is that kind of how we should think about it?

[Brad Helgeson:]

That certainly – Brendan, its Brad. That certainly is our goal we talked about this at length I think when we first announced the intended increase of the dividend over the summer. That we feel like the 50% payout ratio is based on where we are today and potential growth opportunities. We thought that was at an appropriate level. And our goal will be to grow cash flow to invest capital to continue to grow cash flow and by doing so to grow the dividend. So that's absolutely the goal.

[Brendan Naeve:]

Got it. Thanks so much.

[Operator:]

The next question comes from Andrew Weisel of Macquarie Capital. Please go ahead.

[Andrew Weisel:]

Thanks. Good morning guys.

[Tony Orlando:]

Good morning.

[Andrew Weisel:]

As you know, I'm pretty new to the story here. So I'm going to ask a couple of questions that may not be too big – too big of swing factor in the big picture, but would help me put some perspective. First question on energy market, the forward curves have generally picked up since the last quarterly call. When I look at the 2014 market prices, they are actually down by say mid-single digits. Is there a downside risk to your 2014 numbers and of the 1 million megawatts getting market pricing in 2014, how much of that is not yet sold and exposed to those fourth quarter prices?

[Brad Helgeson:]

Hey, Andrew, its Brad. We have a couple of hundred thousand as we sit here today. And we have a couple of hundred thousand megawatt hours of at market generation in the fourth quarter. And certainly to the extent that the market price is in those markets move materially that would be our exposure. So not too significant in the scheme of things given the position that we entered the year with in terms of our open generation and how much we had hedged. And certainly, I think the – any variability there was taken into account when we reaffirmed our guidance ranges today.

[Andrew Weisel:]

Okay. Great. That's helpful. Next on capacity pricing, I know its small for relative to your total revenues. But there is a lot of changes going on in PJM. And so my question is how much upside do you see from these rule changes, how soon would that happen and your facilities, do you think that they will qualify for the new capacity performance product, if its approved as proposed.

[Tony Orlando:]

Sure. This is Tony. Let me take that one. There are definitely some things going on in the markets both in PJM as well as NEPOOL. We did see earlier in the spring the 2017, 2018 auction in NEPOOL, moved up fairly significantly and that will benefit us. It's a quite a few years away of course, 2017, 2018, seems like a long time from now. In terms of what's going on in PJM, at the end of the day we don't think its going to have a material effect on us one way or the other, we do think we will qualify. It's hard to say how those new rules might move prices up, but it's a relatively small component of our total revenue the capacity, and so we don't think it's going to be meaningful for us really one way or the other. The most recent PJM capacity option where the prices did go up, generally speaking it went up only in the uncongested areas, so most of our plants are in the more congested areas. And so the benefit from that option were positive for us was actually very, very small. So maybe just to bring that back around for people that are a little bit more focused on the near term but through really 2017 and 2018, we expect our capacity revenue to be about flat. And then we will have a little benefit in 2017 and 2018 and time will tell where the next auction goes after that.

[Andrew Weisel:]

Okay, great. And then the last one, you talked quite a bit about the maintenance. The maintenance expense in the trends there, so I don't mean you to repeat all that. My question is given that you are trending towards the low end for this year and you found fewer issues as you looked into all the facilities. Does that -- how much of that increase next year is expected to spend; I understand you think the long-term range will be the same. But is it the kind of thing where one year being less than the trends means the next year is more likely to be above the trend?

[Tony Orlando:]

It certainly could be. But, we are going to get it. We are going to lay out kind of our full year expectations for – when we get to the next earnings call. I think as we said, certainly big picture of us intent and plan is to grow our key metrics and we are working our way through all the basic budget issues and making decisions really in the coming months in terms of what projects and where we are going to conduct our maintenance. So we will get into that in the next call.

[Brad Helgeson:]

And just generally Andrew, the maintenance spend in any given year will be based on of course, the risk of stating the obvious based on the maintenance needs of the plants and which vary year-to-year based on the long-term maintenance schedules and so it's really not possible to which I think is really your question, it's really not possible to extrapolate necessarily from one year to the next.

[Andrew Weisel:]

Great. Thank you very much.

[Operator:]

The next question comes from JinMing Liu of Ardour Capital. Please go ahead.

[JinMing Liu:]

Good morning. Thanks for taking my question.

[Tony Orlando:]

Good morning.

[Brad Helgeson:]

Good morning.

[JinMing Liu:]

First, just to clarify the contract with City of Dublin. So if in the scenario, the city as to pay you – are they going to guarantee you a minimal profit or they just make you a breakeven?

[Tony Orlando:]

It's a support mechanism where they are sharing in the upside revenues. They are sharing in energy revenues kind of across the board. And then there is a, upside sharing on waste and downside support of waste. But there is no specific tie back to profitability of the project. It's really focused on the revenue.

[JinMing Liu:]

Okay. You guys are well be responsible for the cost side that you just said.

[Tony Orlando:]

Yes. So we are on the plants and covered and manage the plants as we normally would, if it's focused just on the revenue side.

[JinMing Liu:]

Okay. Good to know. My next is about the New York City project, so how important is the East 91 Street Station, say if we saw that station in 2016, should we still expect a full benefit?

[Tony Orlando:]

So, if you recall, and this goes back to when we first announced the project which is I guess a little bit over a year ago. We talked about the estimated waste from the total project being roughly 800,000 tons per year. And that's split roughly 75% on the North Shore and 25% on the East 91 Street. So that's kind of the big picture in terms of the waste – the waste volume and of course, we won't get the full benefit of the 800,000 until and if they release us on that second transfer station.

[JinMing Liu:]

Okay. Got that. Thanks a lot.

[Operator:]

The next question comes from Barbara Noverini of Morningstar. Please go ahead.

[Barbara Noverini:]

Good morning everybody.

[Tony Orlando:]

Good morning.

[Brad Helgeson:]

Good morning, Barbara.

[Barbara Noverini:]

So regarding the Dublin project, you cited 1 million tons of post recycle waste annually and we could probably expect just grow over time along with population or the other normal waste drivers? However, with Europe setting these ambitious landfill division directives, would you expect to lose some of these tons to recycling as it captures more of the total waste stream in the area over time? Maybe you can comment on the current state of recycling efficiency and capacity in the area and also share with us what are your assumptions for longer term growth of that post-recycle waste stream that you expect to receive at the facility when it opens?

[Brad Helgeson:]

Hey, Barbara, its Brad. Ireland's recycling performance particularly in the Dublin region is actually fairly strong. There I believe last I looked they were in the 40% range in terms of overall recycling rates. Part of Ireland's plan is of course to drive that rate up as high as they can and they have some very ambitious target to that regard. That is, if I got to make it clear that's fully factored into our – and most importantly I think Dublin city councils view on what the long-term need is going to be for addressing waste post recycling. So in terms of the overall waste stream, we have population growth, we have economy activity, I think Ireland certainly as – is now coming out of a pretty low point from an economy growth standpoint and they are on the way up. That would factor into our long-term view, but also the fact that the plan is for the recycling rates to go potentially materially higher.

[Barbara Noverini:]

Okay, great. That's very helpful and congratulations on progression of the project.

[Brad Helgeson:]

Thank you.

[Tony Orlando:]

Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Orlando for any closing remarks.

[Tony Orlando:]

All right. Well, thank you everybody for joining us today. We look forward to, to getting together at the beginning of next year and focusing on 2015 and finishing this year strong. So take care everybody.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.