Covanta Holding Corporation
Q4 2014 Earnings Call Transcript

Published: 12 Feb 2015

[Operator:]

Good morning, everyone. And welcome to Covanta Holding Corporation’s Fourth Quarter and Full Year 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 of 10059534. The webcast as well as the transcripts will also be archived on www.covanta.com. 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, sir.

[Alan Katz:]

Thank you, Dan, and good morning. Welcome to Covanta’s fourth quarter and year end 2014 conference call. Joining me on the call today will be Tony Orlando, our current President and CEO; Steve Jones, our incoming President and CEO; and Brad Helgeson, our CFO. We will provide an operational and business update, review our financial results, and then take your questions. During the prepared remarks, Steve, 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 website, www.covanta.com. These 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, 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, February 12, 2015. 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?

[Anthony Orlando:]

Thanks, Alan, and good morning, everyone. Let me start by saying how pleased the board and I were to hire Steve Jones to take over as Covanta’s CEO. It’s been a real pleasure to work so closely with him during the last couple of months to ensure a smooth transition, and I look forward to passing the baton to him in another few weeks. I’ve been seeing Steve in action for a while now. I’m more confident than ever that his experience, values, and energy, make him a great fit for Covanta, and I’m sure he’ll do a terrific job leading the team. Let’s move on to the business review. I’ll start with a quick summary of the year. For those of you using the web-deck, please turn to Slide 3. I’m pleased with the performance by our team. We maintained our focus to deliver a solid year, operationally and financially, finishing the year within our original adjusted EBITDA guidance range. On the same store basis, we increased waste processing and energy generation. Furthermore, as a result of our organic growth initiatives we had a record year in both metal and special waste revenue. 2014 free cash flow came in $30 million above the high end of our guidance range, let me explain why. At the beginning of the year, we had anticipated a negative impact from working capital in 2014 with a corresponding positive in 2015, primarily related to construction activity. We beat 2014 guidance largely because other working capital improvements offset construction, leaving overall working capital neutral with little impact on last year’s free cash flow. So that was the reason we exceeded our guidance range, but I should note that excluding the better than expected working capital we would have finished on the high end of our free cash flow guidance range, which Brad will discuss when he drills down on the numbers. In addition to having a solid financial year, I’m extremely proud of our strategic accomplishments that position Covanta for a long term growth. The highlights are well known; our cost savings initiative, which is on track to deliver $30 million in adjusted EBITDA benefit this year; our new contract to operate the municipally owned Pinellas County, Florida EfW facility; and last but certainly not least, we began construction on the Dublin EfW facility which is scheduled to come online in late 2017. Furthermore, we increased our dividend by about 50% to $1 per share. That is a strong statement of our confidence in future cash flow and evidence of our commitment to return cash to shareholders. It was a terrific year overall. The team is doing an excellent job managing the business. In 2015, we’ll have to manage a new challenge. Commodity markets have recently turned against us in a meaningful way. The year-over-year decline in both energy and metal price is expected to adversely affect us by over $40 million, which will offset growth in other areas of the business. And as a result, our 2015 adjusted EBITDA outlook as set forth in the guidance we issued last night is essentially flat. Let’s get into a little more detail before I turn it over to Steve. Please turn to Slide 4. 2014 waste and service revenue was right in line with expectations. In addition, we continue to do a great job extending contracts and managing transitions. It was a big year for transitions. We signed a contract with our Fairfax client to supply about two-thirds of the facility’s capacity, beginning next year when the contract will convert to a tip fee arrangement. We also extended service agreements with our Onondaga and Europe clients. And we signed municipal and commercial tip fee contracts totaling over 2.5 million tons per year with an average term of about five years. In total, we signed contracts for approximately 4 million tons of annual waste volume, reinforcing our strong client relationship and maintaining our high percentage of waste revenue under contract. Looking ahead to 2015, we are targeting about 10% special waste revenue growth, plus we had the new service revenue from Pinellas and Durham, and some modest CPI contract escalation. This growth will be offset by waste contract transitions we previously discussed. As a result, we expect North American EfW waste and service revenue will be essentially flat. I should point out that the vast majority of the revenue growth related to the New York city contract will be recorded as non-EfW waste revenue, because it is related to the transportation component of that contract. Now, let’s move on to energy. Please turn to Slide 5. 2014 EfW energy revenue finished within the range we had estimated, so not much to say, except to remind you that we had baked in the higher price due to the polar vortex when we issued guidance last year. This year, with continued strong natural gas production, electricity prices have come down meaningfully in the last few months, particularly in New England. Contracts in hedges are mitigating the impact but with the forwards curve a year-over-year market decline of more than $10 a megawatt hour, we expect our total average energy price to decline 7% as reflected in the table. Notwithstanding that price decline, you’ll note, we expect EfW energy revenue to be about flat. Two reasons for that; first, contracts transitioning to tip fee, where we get all of the energy revenue; and second, new contracts like Pinellas. This manifests in production being up a couple of hundred thousand megawatt hours and higher capacity revenue. But I want to point out that this increase in volume and capacity revenue comes with incremental costs, including operating costs for the new contracts and additional costs on the tip fee transitions that were previously passed through to our client. To be clear, if the forward price curves are an accurate predictor of the actual results, year-over-year hit will be meaningful, it’s about $20 million on EfW facilities. Furthermore, our main biomass facilities which are selling power into the New England spot market will also be affected. We expect that to be about $5 million. Let’s move on to metal on Slide 6. We had another record year for both ferrous and non-ferrous revenues. In total 2014 metal revenue was up 27% year-over-year. This was a result of the benefit of our capital investments and increased management focus. Same store non-ferrous volume was up over 50% and ferrous volume was up 7%. We also had the benefit of higher market pricing in 2014, which is the reason we exceeded the estimated metal revenue range we gave at the beginning of the year. Looking ahead to 2015 we are targeting a small increase in metal recovery, as a result of the Pinellas contract and our investments in new systems. However, as for the energy markets we’ve recently seen a significant drop in ferrous scrap pricing. Last year, the HMS #1 Index averaged $355. For this February, we expect the HMS Index will come out in about the mid-200s. That would be a drop of about 30% from this past October. If we are right and we have good reason to believe we are, that would be by far the steepest drop we’ve seen since post-Lehman. The decline is being driven by a number of factors including global demand, the strong dollar, and low iron ore prices. And it’s very difficult to predict where prices will go from here. Therefore, for our 2015 guidance, we simply assumed full-year market prices for ferrous and non-ferrous scrap will stay about where we expect them to be this month. If that pricing is correct, it will cause approximately $20 million year-over-year decline in metal revenue. Hopefully, pricing will quickly come back closer to the five year average, which is about where we saw prices in 2014. But it’s a commodity, so we know we’ll see ups and downs. Fortunately, our balance sheet and business model give us the luxury of staying focused on the long-term. Furthermore, even with the current price dip, our investments in metal recovery have excellent returns and we’re going to continue to explore opportunities to further increase metal recovery. Please turn to Slide 7 to review operating expense. Our annual maintenance programs went well this past year. Turbine maintenance program progressed even better than we had hoped, as equipment proved to be in good condition with less need for repair than we our original estimates. As a result, we ended the year at the bottom end of the anticipated full-year range for EfW maintenance spend, that includes expense and capital. Given the size and complexity of the fleet we operate, maintenance spend in any given year will move up and down within a band based on the work we need to complete. The fact that we were on the low-end of the band last year does not change our fundamental outlook for maintenance. As a reminder, at the beginning of 2014, we set a reasonable run rate for EfW maintenance spend would be $315 million to $335 million, we’re $10 million higher this year with a range of $325 million to $345 million. The $10 million increase is primarily due to new contracts most notably Pinellas plus modest inflation, which is being partially offset by the portion of cost savings that will benefit this line item. In terms of other plant operating expense on a same store basis, we are up by 1% last year. Looking forward to 2015, we have two factors in addition to normal escalation. First, as mentioned when we reviewed energy we’ll see higher operating expense relating to the contract transitions and new contracts. Second, this is the line item we will see meaningful portion of the benefit from the $30 million cost savings program. We’ll also see the cost savings benefit in the G&A line. Before, I turn it over to Steve. I want to review the status of our New York City marine transfer stations and Durham contracts. Let me take Durham first, this is a publically owned facility, that we’re building under a fixed price construction contract with a value of approximately $250 million. After the facility is complete we’ll operate it under a servicing contract for 20 years. The project construction and start-up is a few months behind schedule. And we’ve increased our estimated cost to complete the project, which adversely affected our finance result in 2014. In fact, this is the primary reason we finished the year at the lower end of our guidance range. Of course, we are not pleased about that, but our focus is to build a world-class facility that we can operate to the highest standards. Doing that will benefit all stakeholders, including of course our client, the community we serve and our shareholders. That has been our priority from day one, and I have no doubt we’ll accomplish that goal. To that end, we reached a big milestone earlier this week, when the facility began accepting waste deliveries. Now we focus on successfully completing start-up commissioning and testing, that will take another few months, after which we’ll begin the 20 year term of the operating contract. Regarding our New York City MTS contract, we’ve already completed test runs and we expect to begin servicing our client before the end of this quarter. Our ramp up in deliveries will take time. And we remain on track to fully service the Queens MTS before the end of this year. The majority of the remaining growth capital expenditures relate to the Niagara rail yard, which we plan to complete by the end of the third quarter. I am confident our team will handle this contract well and we are eager to see the first load ship. And with that, I’ll turn it over to Steve.

[Stephen Jones:]

Thank you, Tony. It’s a pleasure to be here today. I had a chance to speak with a number of you in early January. And as I discussed on those calls, I’m excited to be part of this amazing company. Throughout the past six weeks I’ve been spending my time here on our Morristown office. As well as at a number of facilities across the U.S., and I visited the project site in Dublin. I have had a chance to spend time with many of the Covanta team members as well as with a number of our clients. It’s been a phenomenal experience and I can honestly say that I’m even more excited to take on this role than when I first started. As many of you know, my background is running asset intensive businesses supplying industrial products to clients under long-term contracts. So it’s been a fair amount of time in operating facilities. And I am pleased to say that the Covanta plants are extremely impressive world-class operations. I’ve been particularly impressed with the focus on safety and environmental performance, which are key contributor to the high level of client satisfactions we’ve achieved and which occurred from - I’ve heard about from the clients I have met so far. Also, the team is fully engaged in our efficiency initiative to streamline processes and cut costs. I appreciate this focus on making our processes more efficient and I’m sure we will find further benefits as we work through this process. Looking at 2015 and where we sit today, we’ve had several market challenges ahead of us. As Tony mentioned, the recent decline in commodity prices looks like will be approximately $45 million drag on adjusted EBITDA this year. And we also had the impact from waste and service contract transitions. However, the team is focused on executing on growth and offsetting both of those factors. Our efficiency initiative is on track to mostly offset the decline in commodities, and our organic initiatives as well as our contracts with Pinellas and New York City will offset the contract transition impact. It’s a bit early for me to come out with any long-term plans for the company, but I will say that I am very excited on how well positioned we are for growth over next several years. The contract transitions have been a consistent headwind for the company over the past five years, are primarily behind us. And several key contract renewals and strategic wins, most notably our contract with the New York City and Dublin EfW facility should lead to a nice growth trajectory over the next several years. But in my view, it’s reasonable to expect that the metal prices will rebound back towards the historic five-year average and as the U.S. begins to export liquefied natural gas that’s should help put a floor under our electricity prices in North America. But even at the current market prices we see growth opportunities and we’re going to pursue them, while returning capital to our shareholders through our dividend. All this is a result of our strong free cash flow and our confidence in the continued free cash flow generation moving forward. Brad will get into more detail on the NOL in a few minutes. But I’ll briefly say that our efforts in 2014 and the conclusion of the IRS audit, allow us to revise our outlook for utilizing the NOL and we now expect the NOL to be fully utilized sometime late in the decade. Before I turn the call to Brad, I’d like to publically thank Tony and the rest of the team for all the hard work that have gotten us to this point. I’m very much looking forward to continue to work with Tony and transitioning the CEO role over the next several weeks, and then as a board member after that. With that, I’ll turn the call over to Brad to discuss 2014 financial results and our guidance in more detail.

[Bradford Helgeson:]

Thanks, Steve, and good morning everyone. I’ll begin my review of our financial performance in 2014 with revenue on Slide 10. Revenue was $1.7 billion, up $52 million versus 2013. North America energy from waste revenue was up $49 million year-over-year on a same store basis. The components of this increase were as follows. Waste and service revenue was up $14 million with overall waste price growth of 1.2% driven by special waste growth and contractual escalation and higher volume of waste processed. Energy revenue was up $17 million, driven by higher prices in generation. And recycled metal revenue was up $17 million, also driven by both higher volume and price. The majority of the improvement in metals revenue continued to be driven by our investments to enhance both the quality and volume of metal recovered. Overall, facilities operated very well in 2014, which drove higher same-store revenue across the board. Contract transitions were a net negative $18 million year-over-year, which included a $13 million decline in debt service revenue and a $4 million decline as a result of PPA expirations. This is partially offset by increased revenue related to transactions, primarily the contribution from the Camden facility, which we acquired in August 2013. Outside of North America EfW operations, construction revenue was lower by $20 million year-over-year as the Durham-York project approaches conclusion. All other operations were up $30 million with higher revenue from Transfer stations, China operations and biomass facilities, all contributing to the increase. Moving on to Slide 11, adjusted EBITDA was $474 million in 2014, compared to $294 million in 2013. As we described at the start of the year, we have $15 million of one-time items that benefited 2013. In the North America EfW business, the higher same-store energy and metals revenue that I just noted were big positive drivers. This was partially offset by $5 million of higher maintenance expenses, which while coming in favorably to our initial expectations or still little higher than 2013, driven by the heavier scheduled plant maintenance activity that we discussed at the beginning of the year. Contract transitions negatively impacted adjusted EBITDA by $28 million in total in 2014, primarily consisting of a $21 million decline in debt service billings year-over-year. As we’ve discussed in the past, this negative impact to our reported results will moderate substantially going forward, especially after 2015. You can see the projections for debt service billings in the appendix of this presentation on Slide 22, and I will touch on contract transitions again in a few minutes. All other factors netted to a $6 million negative impact to 2014. On our Q3 earnings conference call in October, I said that we expected to finish the year roughly in the middle of our guidance ranges. So what happened on adjusted EBITDA? As I mentioned last quarter, and as Tony described earlier, the fact that the Durham-York construction project is running a few months behind schedule has resulted in higher costs to complete the job. The cost estimate ticked up further from where we’d estimated at the end of Q3, which pushed our overall results in the lower end of the range. Also, market energy prices dropped a bit further in the fourth quarter after the conference call. Turning to Slide 12. Free cash flow was $240 million in 2014, compared to $245 million in the previous year. As Tony described in his opening remarks, our initial guidance had assumed a significant cash outflow into working capital in 2014, primarily related to construction activity. However, other working capital improvements largely offset construction resulting in a minimum net impact on free cash flow for the year. On a comparable year-over-year basis, the largely neural working capital movement in 2014, compared favorably to the working capital outflow in 2013, which drove the bulk of the other categories show on the slide. You note that we no longer break out construction working capital from free cash flow. We started that last year when we thought there would be significant working capital swings in 2014 and 2015. Given that this didn’t play out for 2014, and we don’t expect much of an impact in 2015 either, we don’t think it’s necessary to continue reporting that number. Moving to Slide 13, adjusted EPS was $0.39 in 2014, compared to $0.38 in 2013. Lower operating income year-over-year was more than offset by benefits from lower non-cash interest expense related to 3.25% cash convertible notes that we repaid in June, higher equity income, and a slightly lower effective tax rate. Turning to Slide 14. Yesterday, we announced the following 2015 guidance ranges, adjusted EBITDA from $450 million to $490 million and free cash flow from $200 million to $240 million. You will notice that we are not providing guidance for adjusted EPS in 2015. For a number of years, we’ve noted that this is not a metric that we focus on at all internally. And given the significant difference between Covanta’s book EPS and its cash flow generated per share, we believe that EPS is a particularly limited value for assessing our results. We’ll continue to report adjusted EPS knowing that it’s a metric that the analyst community tracks, but we no longer spend any time on it in our public discussions. Now, let me spend a few minutes walking through the key year-over-year drivers for our guidance metrics. Please turn to Slide 15. We see adjusted EBITDA in 2015 essentially in a range around where we finished 2014. We’ve had visibility the most of the key drivers in 2015 for quite some time and have discussed each of them publicly. I’ll review those items first then discuss the impact of commodity prices. Our efficiency initiatives remain on track to deliver approximately $30 million of adjusted EBITDA benefit in 2015. As we had originally announced last summer, we expect to have meaningful contribution from new business in 2015, including the New York City MTS contract, the Pinellas contract, and the startup of operations in Durham-York. In total, we see these contributing $20 million to $25 million. On the negative side, we expect $15 million to $20 million impact from tip fee waste contract transitions, which we previously described and an approximately $500 million impact from service fee contract transitions, primarily due to $11 million decline in debt service billings, partially offset by additional energy revenues that we’ll receive as the contracts transition to tip fee structures. As we discussed, the company has gone through a multi-year period where our long-term contracts many of which were originally executed when the related facility was constructed have transitioned. As contracts have reset to prevailing markets rates, they adjust either positively or negatively for Covanta, depending on the specifics of the situation. In addition, as the project debt at facilities that we own and operate under service fee arrangements have been repaid by our clients, the associated debt service revenue that we report has declined. Including the amount in 2015, this will have reduced adjusted EBITDA by a total of $110 million over the past eight years. We’ll continue to have contract transitions in the future, it’s the nature of having long-term contract. However, going into 2015, we can now comfortably say that our contract portfolio is overall fairly close to market. We’ll have ups and downs in any particular year related to the transition of meaningful contracts, but the significant and persistent annual headwinds that we have worked very hard to overcome by growing other parts our business organically and managing costs will be largely behind us after this year. Looking out over the horizon, we anticipate a benefit from contact transitions in 2016, largely related to the Fairfax facility transitioned to a tip fee structure, but then a negative impact in 2017 related to the expiration of a high price PPA in New England. Beyond that, we are looking at relatively small impacts one way or the other, which will largely be a function of prevailing energy prices at the time. Now on to commodity prices. Tony discussed the current market environments for energy and recycled metal extensively already, so I won’t repeat that. In terms of our expected 2015 results, we see the year-over-year impact of approximately $45 million between the two markets. That’s based on the current forward curves for electricity and gas and an assumption for a ferrous scrap metal index price in the mid-200s, then, of course, our guidance range assumes some variability around what we see today. The bottom line is, this business has exposure to commodity prices and net exposure will continue to increase over time as we retain a greater share of energy revenue under tip fee contract structures and we further increased our recovery of metal from the waste stream. Obviously, these prices can impact us positively or negatively in a given year, but over the long-term, we like this exposure, especially relative to where prices are today. Moving on to free cash flow on Slide 16. The midpoint of our guidance range of $200 million to $240 million would imply a $20 million decline year-over-year. As Tony described earlier, our scheduled maintenance plans call for some increased spending in 2015, which will include higher maintenance CapEx in 2015 versus 2014. The total plant maintenance spend, including both expense in CapEx is very much consistent with the go-forward run rate levels that we described a year ago at this time. 2014 came in on the low end, so comparatively 2015 will be higher. As we continue to stress, the spend in any particular year can be higher or lower depending on several factors, including the fact that we manage our life cycle maintenance according to long-term schedules not a fixed amount in a particular calendar year. Free cash flow will also be impacted in 2015 by higher cash interest payments primarily related to our refinancing of convertible notes with straight high yield notes last year. As I mentioned, we no longer anticipate a significant net working capital benefit in 2015. I should note that the timing of payments related to large contracts can sometimes have a meaningful impact on working capital in a given period, so this outlook can always change, but in any event, this all evens out over time. Now, we’ll move on to our growth investments, please turn to Slide 17. We provided a recap of our growth spend in 2014 and our anticipated growth investments for 2015. There are few things that I want to highlight on this slide. First, we made $43 million in investments for organic growth in 2014 slightly less than the $50 million to $75 million that we had initially anticipated at the start of the year. This spend included $17 million towards the admissions control upgrade of the Essex County facility and a little less than $10 million for various metals recovery projects. We came in lower than the expected range primarily due to the timing of commencing working at Essex. In 2015, we again expect to spend approximately $15 million on organic growth initiatives. This includes another $30 million to $40 million for the Essex project with further metal recovery upgrades at a handful of facilities representing most of the remainder. Remember, the Essex project represents $90 million total investment that will continue through 2016. In addition to the investments I just described, we expect to spend approximately $40 million related to the New York City MTS contract. This represents the remaining investment required to be able to receive waste via rail at our Niagara and Delaware Valley facilities. If the city gives us notice to proceed from the Manhattan MTS later this year, then the investment number will grow as we need to procure addition equipment. We are also expecting to spend between $200 million and $250 million towards the construction of the Dublin facility. However, it’s important to note that, while this is a very large investment, it’s primarily funded with offshore cash balances and nonrecourse project financing, so it doesn’t materially impact our domestic corporate funding needs or capital allocation. All in, we are planning to invest between $290 million and $340 million in 2015 towards growth projects. To the extent that we secure new investment opportunities that meet our return thresholds either acquisitions or CapEx, we will revise this outlook as the year progresses. Turning to Slide 18, I’ll touch on our current debt structure, where very little has changed since the end of last quarter. Given our strong free cash flow into the end of the year, we repaid some outstanding revolver balance and end of the year we’re just under $700 million of available liquidity under the credit facility. Net debt was approximately $2 billion at December 31. The net debt to adjusted EBITDA ratio ticked up to 4.3 times at year end, from 4.2 times at September 30, as Q4 adjusted EBITDA was lower in 2014 versus Q4 of 2013. Turning to Slide 19, I’ll discuss our tax outlook. We now expect our federal NOL to shield taxes into the latter part of the decade, likely beyond 2017. This represents a multi-year improvement as compared to our previous expectations and represents meaningful shareholder value. As a reminder, other tax credit carry-forwards will provide a partial ongoing shield after the NOL is fully utilized. Therefore, under current expectations Covanta would not become a full cash taxpayer until the early part of next decade. As always this outlook is based on number of factors including, of course, our long term operating results. Two events occurred in 2014 that changed our outlook for the NOL. First, in conjunction with our efficiency initiatives we restructured and simplified our legal entity structure which unlocked additional NOL. Second, we reached a settlement related to the IRS audit of our 2004 to 2009 tax years, which has been ongoing for the past four years. While the settlement didn’t increase the NOL, it provided us with much greater clarity on our expected utilization. In 2015, we expect cash taxes to be in the range of $10 million to $15 million, consistent with the past several years. Moving on, I have a few comments regarding our dividends. Please turn to Slide 20. Given our strong free cash flow and the long term stability of this business, we increased our dividend by over 50% in 2014 to an annualized rate of $1 per share, which represents nearly a 5% yield today. The current payout equates to about 60% of our free cash flow this year at the mid-point of our guidance. When we announced the dividend increase we referenced targeting approximately 50% of our long-term run rate free cash flow. Obviously, it appears today that the recent move in commodity prices will push the payout above that level for this year. However, the dividend increase was a long term decision in comment. The right level isn’t based on a specific percentage in a particular year. Historically, we’ve assessed the dividend for potential increase in March each year. However, given the recent off-cycle increase to a $1 per share in Q3, we’re now planning to establish our regular quarterly board meeting in December at the time for the annual review of the dividend. This timing coincides with our annual budget review and long term planning process, so it’s an appropriate time to make this decision in any event. It’s too early to speculate on our potential increase to the dividend later this year. Right now, we’re focused on executing on the numerous opportunities that we have in front of us in 2015 to increase long term shareholder value. In closing, 2014 was a pivotal year for Covanta, positioning the company well for the long term. There are several meaningful growth drivers in place, and this business will continue to generate substantial and predictable cash flow for our shareholders even in down commodity markets. Before we move to Q&A, I’d like to thank Tony on behalf of the employees of Covanta for his incredible leadership over the past decade plus. I look forward to continuing the benefit from his guidance and unmatched experience in his new role as he remains on our board. And in the same breath, I’m tremendously excited about Steve coming onboard to take in the reins as CEO. He’s a dynamic leader, who I’m convinced will take Covanta to the next level. Alan and I are very much looking forward to introducing him to the Covanta investment community. I think you’ll all quickly see what I’ve seen working with him over just the past six weeks. So with that, Dan, I would like to open it up for Q&A.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Al Kaschalk of Wedbush Securities. Please go ahead.

[Al Kaschalk:]

Good morning, everybody. Tony, I just want to say thanks for the time over the last several years and look forward to continue to work with you.

[Anthony Orlando:]

Good morning. Thanks, Al.

[Al Kaschalk:]

First, I want to focus maybe on the majority of your business and that is, that the waste volumes and in particular given what is expected to be increased disposable income. How that may change volumes to your plan in terms of consumption, generating waste, et cetera? So I don’t know if you have a - you could give us some color on that dynamic in the marketplace.

[Anthony Orlando:]

Sure, let me take that one out. I think generally speaking as the economy improves and waste generation increase, the way that affects our business is more on price, not volume. Our facilities, we run essentially at full capacity. And so to the extent there is waste generation because of this greater economic activity, that will put upward pressure on pricing, but it doesn’t change the volume.

[Al Kaschalk:]

So, but theoretically, obviously, it benefits cash flow and potential margin.

[Anthony Orlando:]

Sure, I mean, to the extent we can - to the extent we can drive prices up, because there is greater waste generation that benefits the bottom line. And we think particularly given the fact that we were able to re-contract so much waste last year that starts to put us in a little bit better position with respect to where we are at pricing at the facilities.

[Al Kaschalk:]

Exactly and then my follow-up if I may, a little bit broader question on the nature of the fixed contracts for construction work and obviously a little bit more elevated with Durham-York here. Could you talk about if that is something you can work through in terms of changing structures. Is there an opportunity to go back to collect or - and renegotiate some type of contract change on that or is that - is this a water under the bridge here?

[Anthony Orlando:]

Well, a couple of things, I mean, first off, we built 20 plus, it’s getting close to 30 facilities now including four very large projects recently. I mean have a terrific track record both with projects that are owned by Covanta as well as projects that we’re building on, on behalf of client community such has Durham. So look I don’t want to understate our disappointment that Durham being a little bit later and a little bit more costly. But I also don’t want to overstate it. These are large complicated projects and we’re going to be a few months later than we expected and it’s going to a cost us a little bit more. Clearly, we’re always trying to learn lessons and how we can contract most effectively and be most efficient in our overall project. So we’ll certainly kind of incorporate lessons learned as we always do into future projects. But with respect to the project at Durham, basically, we’ve got our kind of best estimate at the final cost is already reflected in totality.

[Stephen Jones:]

Al, this is Steve Jones. One thing that we’re looking at obviously is the Dublin project. That’s underway. I’ve been out there as I mentioned in the prepared remarks visiting the site, that’s going along quite well. We teamed with an experienced local construction manager and civil contractor, plus we have Hitachi, those in building the rest of the plant on a turn-key basis. And if you know Hitachi they’ve built more energy from waste facilities than any other company. Again, we’re trying to take lessons learned from Durham and apply to Dublin to make sure we have a successful project in Ireland.

[Al Kaschalk:]

That’s great. Look forward to working with you too, Steve.

[Stephen Jones:]

Thanks, Al. I appreciate it.

[Operator:]

Our next question comes from Tyler Brown of Raymond James. Please go ahead.

[Tyler Brown:]

Hey, good morning, guys.

[Anthony Orlando:]

Good morning.

[Stephen Jones:]

Good morning.

[Tyler Brown:]

Hey, can you give us some color on maybe how many megawatt hours and at what price that New England PPA that expires in 2017 is?

[Anthony Orlando:]

Yes, Tyler, it’s a little early to get into that kind of detail. I think we just wanted to speak generally to the overall trends that we’re going to see over time in some of these transitions. As we get closer to have more visibility to what the market is that far out and so forth we’ll get into some more of those details.

[Tyler Brown:]

Okay. That’s helpful. And then, it was very helpful that you guys gave that $20 million to $25 million variance on the new projects in 2015. But can you guys kind of frame for us the pieces maybe in there, maybe what New York City will be of that? Is it maybe half of that bucket?

[Anthony Orlando:]

We intentionally don’t get into the profitability details of any particular contract, and there are several reasons for that. So we’ll leave it at the $20 million to $25 million that covers those deals in totality.

[Tyler Brown:]

Okay. And then just kind of a last one here, but I’m curious. So you’re selling your main biomass plant into spot-need pool. Are those plants EBITDA positive at current prices, do you have any plans to idle them if not?

[Anthony Orlando:]

They are profitable at current prices. Of course, at some point, they - if prices are low enough they’re no longer profitable, in which case we won’t run. So the way we think about that generation is ultimately of course there is a floor under it. It’s a little bit different dynamic than our energy from waste facilities, where they are profitable just processing waste. And so we are going to be selling megawatts 24/7 no matter what.

[Tyler Brown:]

Okay. If I could maybe squeeze one little quick one in, but on the NOL, so you guys gave some good cash tax guidance for 2015, and we have the extension on the NOL, but can you give us any look for when we do begin to see some of the steps up in the actual magnitude of cash taxes?

[Bradford Helgeson:]

Well, the timing we are talking about based on what I just said, you are talking about 2018, 2019, I mean there are so many variables in play here between sitting - from where we sit here today to that point out. So, I think, it really would be premature to talk about specific dollars of where the taxes may go. So we have said, just on this topic, we have said that, ultimately once we have utilized the NOL and we’ve utilized the benefit of the other tax credit carry-forwards that we still have on the balance sheet then you should think about for a very long-term modeling, our cash taxes essentially coming back to something closer to a statutory federal and state tax rate.

[Tyler Brown:]

Okay, perfect. Thank you.

[Anthony Orlando:]

Of course, assuming that we don’t do any other tax planning in the meantime, so we’ve got a long runway.

[Bradford Helgeson:]

Right.

[Tyler Brown:]

Right. Okay, thanks.

[Operator:]

[Operator Instructions] Our next question comes from Scott Levine of Imperial Capital. Please go ahead.

[Scott Levine:]

Hey, good morning, guys.

[Anthony Orlando:]

Good morning.

[Bradford Helgeson:]

Good morning, Scott.

[Scott Levine:]

And Tony and Steve, I just wanted to echo Al’s comments, best of luck in the future with your respective roles.

[Anthony Orlando:]

Thank you.

[Scott Levine:]

Question, I guess, regarding the maintenance - the plant maintenance and also the cost savings program, could you maybe provide a little bit more color your comments regarding 2015, we’re clear on both. But do you think these both represent levels, given your current outlook for the business that are sustainable going forward and/or, do you see potential for maybe on the overhead and the efficiency side if we see further weakness in commodities, do you see potential for additional savings in the future, I think this is the right level of cost for the business at the - in those categories?

[Stephen Jones:]

Hey, Scott, this is Steve, I’ll take this. I think, the OC program that we put in place, which were the efficiency initiatives is a good starting point to start look at our business processes and how we operate plants, and let’s face it. These are complicated operating plants. There is a lot of moving parts, a lot of things coming into the plants. They are also getting older, and so we’ve got a program underway, where we are looking how we optimize our maintenance activities and so some of that’s built into the programs we have in place already. But I think you will see over time, we’ll continue to look at these types of things in order to see how we can more efficiently run the business. So I talk about a culture of continuous improvement. I think over time, you will see us continually trying to advance our capabilities in this area.

[Scott Levine:]

Thank you. And as my follow-up, I guess, maybe for Brad, you are clear with regard to the dividend, not really much mention of repurchase, I’m guessing, there is not much in the cards for 2015 there, but if you don’t mind us your thoughts on the repurchase program and maybe what circumstances you guys might be willing to take a look at that again and thoughts as well leverage is maybe a little bit above what your target range is, but comfort operating at current levels.

[Bradford Helgeson:]

Sure. Yes, a couple of related topics there. So our capital allocation policy remains completely consistent with what it’s been for the last several years. As we look at potential uses of our cash to allocate, we look at three primary areas, one being, of course, the dividend, now which is much more substantial than it had been over the last several years. We look to grow the business, where we think those investments are value accretive for shareholders, and to the extent we have excess cash flow. We’ll look at share repurchase as we have pretty substantially in the past. Obviously, we shifted over time over the last four year from more share repurchase, less dividend to more dividend, less share repurchase, I think that was appropriate for the nature of the business, but all three always remain on the table. But if you take our guidance for this year and overlay, what we said about capital allocation with the midpoint of our free cash flow guidance range, the size of our dividend, and the pipeline that we have, our committed growth investments, the math is pretty simple, there isn’t much free cash flow with any left over. So that probably tells you everything, you need to know about our share repurchase plan at the moment, obviously any number of factors could change. Now, you mentioned the leverage. As I said in the past, I think four times is net debt to EBITDA is a logical place for Covanta to be for a number of reasons. I think it’s a nice balance between having stability and having the flexibility to increase leverage to take advantage of opportunities, while at the same time using a decent amount of debt in order to lower our overall weighted average cost to capital, also it’s consistent with our current credit ratings, which we are looking to maintain. Now there’s nothing magical about 4.0 times I think over the last couple of years, we’ve been a little below that number, we’ve been a little above that number, but within a range, we’re in our comfort zone. So tying back to the share repurchase, okay, the free cash flow was largely spoken for this year. Would you lever up the balance sheet to buy back stock? Again, I think I just return to my comments about the right leverage level for this company, we think that’s the best balance to ultimately increase shareholder value.

[Scott Levine:]

Got it. Thank you.

[Bradford Helgeson:]

Thanks.

[Operator:]

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

[Michael Hoffman:]

Thank you very much. And Tony, it’s really been a pleasure and good luck.

[Anthony Orlando:]

Thank you, Michael.

[Michael Hoffman:]

Brad, Tony, Steve, all of you electricity hedges, just want to sort of revisit that, remind me, I believe, if I’m correct, this is a very dynamic hedge, you are minimizing the downside to $15 million of exposure and that’s captured in the guidance as well kind of what you are doing with your hedging? There actually is a question in that, believe it or not.

[Bradford Helgeson:]

Yes, that’s right. I think what we’ve seen here, we have a hedging policy that substantially reduces the variability of the impact of the variability of market power prices, but, of course, doesn’t eliminate it complete. The only way to eliminate completely is to fix price sell all of our generation on a forward basis, we don’t think that’s the right answer. We target a $15 million over a 12-month look forward, of course, our plan as you know, looks out over 36 months. But in that first 12-month window, we do tend to target in the $15 million area for a limit to the exposure. Looking at the numbers you can see the impact of this recent and significant decline in prices, it’s actually been a little more than that. And the reason is in the hedging program, we base our decisions and estimate our revenue at risk based on statistical analysis that we do to a 95% confidence level. Sometimes you are outside the 95% and we saw that a bit here over the last couple of months, it was a pretty significant move. So, nothing has changed. We think that the hedging program we have is appropriate, but yes, it’s a good point. All that we have in place and our expectation for any additional hedges to maintain our - the levels stipulated in our program are all baked into our guidance.

[Michael Hoffman:]

Okay.

[Anthony Orlando:]

Michael, this is Tony, I would just add one thing there that the $15 million Brad spoke of is, what we look at it on the downside, given where the markets are today. We actually have quite a bit more upside for a couple of reasons, first, obviously prices can only go down so far in the market. But the other perhaps more substantial reason is that, as we’ve discussed in the past, we have contracts that have colors on those, and we’re very close to the bottom of the colors on those contracts, so they can’t go down much further they can’t go up. And then in the biomass it was mentioned earlier, that’s a kind of barely in the positive territory now, so as it gets much worse, then we would have to not run that plant, but if it gets better like it was last year, we have upside opportunity. So I think there is a number of ways that can get - they can get better from where it is today.

[Michael Hoffman:]

Okay. And then, I know you’ve talked about capital allocation, Brad, but I want to ask this very specifically, because you haven’t said it specifically, whether you grow at one-tenth of percentage point or grow at a lot. You intension is to grow the dividend, where it’s - I’m not asking about the degree, but the intension is to grow it. Is that correct?

[Bradford Helgeson:]

Yes, certainly it’s our - I used the word goal. It’s our goal to grow it, and we’ll make that decision later in the year.

[Michael Hoffman:]

Okay. And then one last question, Steve, welcome aboard and you can open the door for this, so I have to ask it, outside of the obvious New York City, Indianapolis, Durham-York, and Pinellas and Dublin, what is it that you see that such a great growth opportunity for the company?

[Stephen Jones:]

Well, I think this is phenomenal company. If you do look at just energy from waste as a market, populations continue to grow, so what do we have 7 billion or so people in the world, going up to 9 billion or 10 billion by 2050, and still over 60% of the waste that’s produced by these people is going in landfill. So if you look around the globe and not in a particular place, I think, there is going to be opportunities to deal with this - the waste that’s being produced. So I think if you look at kind of - I won’t get into a lot of specifics, but I think there will be tuck-in acquisitions in North America to support our portfolio. There is technologies to improve the performance of our existing facilities, and I think that’s important. There is going to be a continued push on organic growth initiatives, as well as looking for new operating contracts. And then as I said this, from a world standpoint there is other geographies places like Asia, Europe, Australia, where we look for both development and acquisition opportunities. So I think it’s a good time to be in the energy from waste spaces, it’s my take on things.

[Michael Hoffman:]

Terrific. Look forward to meeting you.

[Stephen Jones:]

Thank you.

[Operator:]

Our next question comes from Dan Mannes of Avondale Partners. Please go ahead.

[Dan Mannes:]

Thanks, good morning. Tony, again congrats, it’s been a pleasure and Steve welcome aboard.

[Stephen Jones:]

Thanks, Dan. I appreciate it.

[Anthony Orlando:]

Thank you.

[Dan Mannes:]

Sure. A couple of things, I want to focus first on energy. You mentioned kind of the minimizing your exposure with a goal of 15 months on a roll. As you look forward, especially given how much more open your power position gets over the next couple of years. Should we anticipate you getting a lot more aggressive in hedging, or given where prices are in your view of downside, are you more willing to be open just given that you don’t view as much downside at current prices.

[Bradford Helgeson:]

Well, as the size of our up market portfolio grows, Brad, by the way, we’ll have to reassess the levels of - in the hedging program. The reason being that as a practical matter operationally, there’s a limit to how much makes sense to hedge without opening yourself up to risk associated with generation. So I think for the next couple of years, we look out to the projected megawatt hours, the current levels that we are dealing are probably the right one. But directionally, you would see that increase before you would see a decrease.

[Dan Mannes:]

Okay. And the second thing I wanted to ask is, you talked a lot about the service fee transition you’ve been going through the last few years and obviously those should be smaller. For 2015, this is the first year we kind of saw a meaningful step down in a - in tip fee pricing on the tip fee contracts. Can you talk about any other headwinds maybe on the tip fee side and alternatively any potential headwinds as it relates to biomass plants, as I think all the contracted ones are coming off contract in the next couple of years?

[Bradford Helgeson:]

Yes. I think, this was a - as Tony described, I mean, this was a very significant year for us where we had a number of large tip fee contracts, coincidentally expiring all at ones. And we really set ourselves up here well for the next few years, where if you look at signing up these contracts, if you look at the changing dynamics in a couple of our markets with the New York City contract waste coming on for the first time, while frankly, we feel like on the waste side maybe we can place some offense instead of defense. So we feel pretty good about where the portfolio sits at the moment. On biomass, we are running one California facility. We have five as you know, in California, four of them are shut. One of them we’re running on a one-year PPA. We’ll see what happens at the end of this year and whether we extend the PPA for that facility. But to the extent that we shut that facility down to be a bit of a headwind, but it’s not material in the scheme of things, we don’t make a tremendous amount out there.

[Anthony Orlando:]

Yes. This is Tony, I would just say this kind of, particularly, given where we are with 2015 guidance, the biomass is a very little contribution. And so kind of the way I think about it as it’s an upside option, if things get better, they can have some real value, but it’s really - it’s not contributing much in 2015 so.

[Dan Mannes:]

Got it. Thanks.

[Stephen Jones:]

Thanks, Dan.

[Operator:]

Our next question comes from Gregg Orill of Barclays. Go ahead.

[Gregg Orill:]

Yes, thank you. I was wondering if you could touch on exposure to capacity markets, I know you’re talking a little bit around the biomass plants, whether there is a capacity, where they get capacity payments in New England and maybe a reminder of what the PGA exposure there is?

[Anthony Orlando:]

Yes. So, I guess a couple of things. Capacity particularly in New England, of course, the trend has been in a very favorable direction in the last couple of auctions, was up last year and then up again. And that clearly benefits our waste energy facilities, because as Brad, said, we know we’re going to run those plans. We’re very comfortable biding forward into the auction market to commit to that capacity. One of the challenges on the biomass as we’ve described is that, you are not - having the confidence that we’re going to run them, because where energy prices will be, we really - it’s difficult to take advantage of the capacity market. But again the trends, I think have been - you are clearly favorable in New England, you get out to that 18, 19 auction was good. So we definitely have some a little bit of tailwind on capacity revenue in New England. And PJM as you know, is looking a little bit better, although not as significant as the NEPOOL market. So over the long-term we think having these facilities in congested areas both from a waste supply and an energy production gives us a great advantage, and we think that the value of that will continue to be further recognized in the marketplace.

[Gregg Orill:]

Thank you.

[Operator:]

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

[Andrew Weisel:]

Hey, good morning, guys. Just a follow-up on that last question. Can you disclose roughly the number of megawatts you’ve been clearing in New England?

[Bradford Helgeson:]

Yes, I don’t view [indiscernible]

[Anthony Orlando:]

We do. You can actually - Andrew, you can see it in the slides that we have in the appendix of the presentation on number 24.

[Andrew Weisel:]

Okay, great. Thank you. The next question was in - with regards to the metals and the benchmark pricing, what’s the mix you typically get on the non-ferrous side, is that mostly aluminum, or what are some of the other components in that mix?

[Bradford Helgeson:]

It is mostly aluminum of - it’s not at the clear kind of straight line you can draw from the HMS index on the ferrous side, but it is mostly aluminum on the non-ferrous side. And that pricing has so far it’s down a bit. But that’s helped reasonably affirm to where it was last year, it’s really the big dip that we’ve seen is in the ferrous scrap pricing.

[Operator:]

Our next question comes from Tyler Frank of Robert Baird. Please go ahead.

[Tyler Frank:]

Hi, guys. Thanks for taking the question. Just wanted to touch on, I know you - in the presentation you put that you’re looking at strategic acquisitions. I was hoping you could just give us a little more information about that and what sort of M&A opportunities might be seeing in the marketplace?

[Bradford Helgeson:]

One-on-one I take that Tyler. We don’t usually comment on acquisition activities, so I think it would be premature at this point. I do think the opportunities as I mentioned were earlier around the globe and whether it’s business development for acquisition activities and the energy from waste space we’re a leader. So, we’ll obviously take a close look at anything that kind of comes on the market.

[Tyler Frank:]

Okay, great, thanks. And then in terms of the maintenance spend this year, can you give us the expected cadence of that and how I should think about that flowing through each quarter?

[Bradford Helgeson:]

Yes, it’s Brad. The waiting of the spend across the quarters will be consistent with what it’s been over the last several years. If you look back really as far back as we’ve been providing the maintenance information, you’ll see that in the first-half about 60% to 65% and the rest in the second half, we’ll be in that range again. And we are exactly falls in Q1 or Q2 or Q3 when we stay away from that just because it’s very easy for a project slip a week one way or the other, so - but 60% to 65% first-half is the right way to think about.

[Tyler Frank:]

Okay. Thanks, guys.

[Bradford Helgeson:]

Thanks.

[Operator:]

Our next question comes from Charles Redding of BB&T Capital Markets. Please go ahead.

[Charles Redding:]

Good morning, gentleman. Just a quick follow-up on energy, if I may. Is the higher proportional PJM exposure, PJM East exposure in 2016, is that simply a matter of proximity in terms of the contracts that are transitioning?

[Bradford Helgeson:]

Yes, that’s the - hey, Charles, it’s Brad. That’s the Fairfax contract coming in at PJM.

[Charles Redding:]

Okay, great. And then, in terms of maintenance, you briefly mentioned Pinellas, are there any noteworthy issues here and at Essex, is that essentially the last major emissions control investment that you are expected to make kind of for the foreseeable future?

[Anthony Orlando:]

In terms of the maintenance really all we want to point out is that, we take on a new contract, there’s new operating expenses, new maintenances, there’s new revenue. Then we so far all - we wrapped up all those contracts into that one line in the waterfall that Brad talked about in terms of new business, in terms of the benefit on the EBITDA. With respect to emission controls equipment, we don’t have anything else in the plans right now. But, look, that something that we’re constantly looking at both in terms of what we can do to improve our performance and, of course, what’s required by regulatory changes.

[Charles Redding:]

Great. Thank you, Tony, and good luck.

[Anthony Orlando:]

Thank you.

[Operator:]

Our next question comes from Barbara Noverini from Morningstar. Please go ahead.

[Barbara Noverini:]

Hey, good morning, everybody. Best wishes to you Tony and welcome aboard Steve.

[Stephen Jones:]

Thanks, Barbara.

[Anthony Orlando:]

Thank you.

[Barbara Noverini:]

Can you provide us with an update as to how your plans for the recycling facility in Indianapolis are progressing? And just to be clear, your guided CapEx range for 2015 doesn’t include starting work on that facility this year, right?

[Anthony Orlando:]

Right, right. We are in the permitting phase there now. And we hope to have the permits there such that we might be able to start it before the end of this year. So it’s possible that we can start construction late this year, if we get the permits, we can update the estimates. But even if we got the permits middle to the latter part of this year, most of the construction activity would be in 2016.

[Barbara Noverini:]

Okay, great. Thanks.

[Operator:]

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

[Anthony Orlando:]

All right. Well, thank you, everybody. I certainly appreciate the well-wishes and just want to take this opportunity to say how much I’ve enjoyed working with all of you over the last 11 years. I feel good about the things we’ve accomplished and certainly been my honor and privilege to be such a terrific group of employees and serve our clients and work on behalf of our shareholders. So I look forward to continuing to serve on the board, and I’m confident Steve and the entire Covanta team will take this business to even greater heights in the years ahead. Thank you all.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.