Covanta Holding Corporation
Q1 2015 Earnings Call Transcript

Published: 23 Apr 2015

[Operator:]

Good morning, everyone, and welcome to the Covanta Holding Corporation's First Quarter 2015 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 1-877-344-7529 and use the replay conference ID number of 10063395. The webcast as well as the transcript 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, and good morning. Welcome to Covanta's first quarter 2015 conference call. Joining me today on the call will be Steve Jones, our 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 their prepared remarks, Steve 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, April 23, 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 express 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 information regarding definitions of our non-GAAP measures and how we use them as well as limitations as to their usefulness for comparative purposes, please see our press release which was issued last night and was furnished to the Securities and Exchange Commission on Form 8-K. With that, I'd now like to turn the call over to our President and CEO, Steve Jones. Steve?

[Stephen J. Jones:]

Thanks, Alan, and good morning, everyone. As my first conference call as Chief Executive Officer, let me start off by saying that I've very much enjoyed getting to know many of our stakeholders over the past several months. Been a busy time here at Covanta, but we're all very excited to be moving ahead on so many important projects. With that, let's start off with the review of the business and markets. For those of you using the web deck, please turn to slide three. Operationally, the quarter was very strong. The plants ran well and were full of waste despite record snowfall in some of our core markets. As many of you would have expected, there were some additional costs associated with this harsh weather, but the benefits of our operational efficiency programs in the quarter more than offset that. We also continued to make great progress on several of our key strategic initiatives. We had a very strong quarter in terms of special waste revenues and metals recovery. These are two areas where we continue to see opportunities for growth. I'm also pleased to say that we started servicing our New York City client at the Queens Marine Transfer Station this quarter. This is very exciting milestone for all of us. We are taking that waste directly into our Delaware Valley facility for now, and we expect to start taking deliveries to our Niagara facility by the end of the year once the construction of the rail yard of that facility is complete. As planned, the city is ramping up volumes slowly to ensure that all of the systems and operations are running smoothly. Our cost savings and efficiency programs are doing well and we are on track to deliver the $30 million in adjusted EBITDA benefit that we highlighted at the start of the year. The benefits from these programs are starting to flow through both the maintenance and non-maintenance expense lines as we expected when we gave guidance. Financial results during the quarter were right in line with our expectations. We recorded Q1 adjusted EBITDA of $79 million and free cash flow of $16 million. Results were driven largely by year-over-year impact of lower pricing in the energy and metals market and the impact of contract transitions on the waste line. We were able to partially offset these factors with consistent and cost efficient operations in the quarter. Brad will get into the details on what drove results on a line item basis a bit later in the call. Overall, this was a good quarter and I am very pleased with the team for the hard work they put in during the tough winter. One of the reasons I came to Covanta was the strong reputation as a great operating company. After spending the past couple of months in the CEO seat, I can say that reputation is well deserved. This was not an easy quarter to operate these facilities and our team didn't miss a beat. Now, let's move on to the discussion on the waste business. Please turn to slide four. The client service highlight for the quarter was the commencement of our New York City contract as I just discussed. I'm also pleased to announce that just this week we reached an agreement to extend our contract with the City of Long Beach by five years to 2024. We've also achieved record revenue on our special or profile waste business during the first quarter. This is especially impressive given that this is a quarter that tends to be difficult to secure special waste. Looking ahead for the rest of the year, this book of business is on track to meet our annual expectation of double digit growth. Our team has done a great job of engaging with new customers and expanding relationships with existing clients. Overall, I am really impressed with what I'm seeing from this group and from our opportunities to grow in this area. As you all know, this growth shows up in our results not as additional waste processed in our facilities which already run in full capacity, but as a driver of higher overall waste revenue per ton as these higher priced volumes replace lower priced spot tons. In terms of price and volume for the quarter, Q1 was right in line with our expectations and we see no reason to change our outlook for the full year. Contractual escalations continue to move pricing up for our contracted waste stream, and we are expect to see prices rise by about 1% on average this year. In terms of spot prices in our markets, we're generally seeing stable pricing conditions, we'd expect this trend of stable pricing to continue and don't see much on the horizon that will drive market spot pricing meaningfully up or down. Now let's move onto energy, please turn to slide five. Q1 2015 Energy-from-Waste energy revenue was flat versus the same quarter in 2014. Last year's strong first quarter market pricing made for a challenging year-over-year comp, but this impact was nearly offset by the increase in energy revenue share from contract transitions, the Pinellas contract and the impact from our hedges. Revenue was flat compared with 2014 from a volume standpoint. So basically, overall energy production was slightly higher, but the revenue associated with that generation was slightly lower due to mix. I'll note that we added some additional hedges to 2015, 2016 and 2017, based on our hedging program and risk management policy. We've updated slide 17 to reflect this. You can see, we're benefiting this year from higher average hedge pricing that was locked in last year when the forward curves were higher. I'm now on slide six. As expected when we established guidance, market pricing has had a significant impact on our metals revenue this past quarter. The average price for the HMS #1 Index was $255 per ton in Q1; that's a $118 decline compared with the same quarter last year. Same store metal pricing was down 28% year-over-year. In terms of volumes, non-ferrous volume increased 18% year-over-year as a result of the systems that we installed in 2014. Ferrous volume was down 4% as higher recovery from new systems was offset with the build-up of inventory of ferrous metal. Adjusting for that, we would be up a few percent. Overall, we had another strong quarter for metal recovery and we expect that trend to continue through 2015. From a pricing standpoint, we'll see how the market moves over the next few quarters. Our guidance covered a range of ferrous HMS #1 Index prices from $200 to $300, and that's where we've been so far on average. In terms of the non-ferrous markets, our primary non-ferrous product is aluminum, where forward prices indicate stable to stronger market prices for the remainder of the year. Let's now move on to operating expenses and CapEx. Please turn to slide seven. The back half of Q1 and the first half of the second quarter are the heaviest part of our maintenance cycle and I'm very pleased to note that things have gone very well so far. As I mentioned earlier, we're starting to see the impact of some of our cost savings programs that we implemented over the past year. Our total maintenance spend, both expense and CapEx, declined 11% from Q1 2014. On a same-store basis, total quarterly Energy-from-Waste maintenance spend was down 12% versus last year. A portion of this is timing and will be captured in the Q2 maintenance spend, but the team has also done a great job in embracing the outage efficiency programs that we've worked hard to implement and you can see the results of their efforts in the Q1 numbers. I would expect to continue to see a benefit to this line in 2015 from our operational improvement initiatives which was reflected in our guidance. In fact, this is an area that I'm hopeful to see some additional benefits beyond 2015 as well. As many of you already know, I'm very passionate about maximizing operations and squeezing more value from our existing assets. Efficiency and process improvements are area where I see an opportunity to do just that. We're focused on creating a culture of continuous improvement throughout all of Covanta. In doing so, we're looking how to best utilize tools that will enable our employees to do their jobs even more efficiently and effectively than in the past. Covanta has a world-class operating team and a track record that is second to none, but we think we can always do better. I should also note that North America Energy-from-Waste other plant operating expenses were down on a same-store basis this quarter compared to Q1 2014. This was primarily the result of lower fuel expense from the new steam package boiler that we installed at our Niagara facility and less wet waste at some of our facilities outside of New England. Let's move to slide eight to discuss our business outlook. 2015 continues to be impacted by challenging commodity markets. However, if you step back, this business has a highly contracted revenue stream which provides a high level of visibility. And not just for this year; we'd expect that 2016 would have a somewhat similar contracted profile. This year, we're focused on executing on our operational objectives and the exciting new projects in our portfolio, but we're also looking at the horizon and the opportunities to grow cash flow and increase value for our shareholders consistently in the future. When I joined the company, I saw an incredible asset base that is irreplaceable, that can also be leveraged for growth in multiple ways. So, for example, running our operations more profitably and expanding our capabilities and range of services for our clients. I also believe we can use our core competencies and unmatched experience to replicate our business in new markets like we're doing in Dublin. There are a number of countries where Energy-from-Waste has strong regulatory support and where operating expertise would help create value. While there is nothing specific to discuss today, we're keeping our eyes open for the right opportunities. I can confidently say that I see plenty of opportunities that will allow us to protect our base business and achieve growth over the long-term. With that, I'll turn the call to Brad to discuss the first quarter financial results in more detail.

[Bradford J. Helgeson:]

Thanks, Steve, and good morning, everyone. Before I get into the financials, I'd like to quickly explain an accounting change that became effective for us this quarter. Under new FASB guidance regarding service concession arrangements with public sector entities, we'll now be required to expense maintenance costs that we previously capitalized at our service fee operated facilities. The impact of this will be a one-time balance sheet adjustment of $75 million of PP&E to retain earnings at March 31 and then a re-class for maintenance capital expenditures to maintenance expense going forward, which amounts to $8 million in the quarter and approximately $30 million on an annual basis. We've modified our definition of adjusted EBITDA to adjust for this accounting change; in other words, to present it on the basis of the previous accounting methods, so that our results for this year will be comparable to historical results and to our guidance range. You'll see this adjustment clearly laid out in the non-GAAP reconciliation in the press release and the appendix of this presentation. Free cash flow is unaffected by the accounting rule change as this is simply a matter of geography between the P&L and cash flow statement. And in our discussions of maintenance activity, we focused on total maintenance spend including both expense and CapEx anyway, so again the accounting doesn't impact that. If you're wondering why we didn't flag this accounting change earlier, it's because we only recently reached a final determination on how this new FASB guidance will impact our public contracts, if at all. The guidance only directs companies on how not to account for service concession arrangements, but these open the question of how to account for cost of asset maintenance that historically have been capitalized. So it took some time for us to determine the right path forward. I'll now begin my review of our financial performance in the first quarter with the revenue on slide 10. Revenue was $383 million, down $18 million versus Q1 of 2014. North America Energy-from-Waste revenue declined $6 million year-over-year on a same store basis. Waste and service revenue increased by $6 million, driven by both higher volume processed and higher same store price. However, this was more than offset by a $7 million decline in energy revenue, driven by lower year-over-year prices and slightly lower generation volume as well as the $5 million decline in recycled metal revenue also driven primarily by lower price. Contract transitions were a net negative $2 million year-over-year, which included a $3 million decline in debt service revenue. Transactions or net new business increased revenue by $3 million with the contribution from the Pinellas County facility operating contract which commenced in December of 2014, partially offset by our Hudson Valley EfW facility operating contract which ended in mid-2014. Outside of North America EfW operations, construction revenue was lower by $10 million year-over-year with the construction phase of the Durham York project wrapping up. All other operations were down $3 million with lower biomass revenues partially offset by new non-EfW business, including the transportation and logistics component of the New York City MTS contract and the TSDF that we acquired at the end of 2014. Moving onto slide 11, adjusted EBITDA was $79 million in Q1 2015 compared to $87 million in the same quarter last year. The year-over-year decline was primarily driven by lower energy and recycled metals prices in the North America EfW business, totaling $11 million. There was also a $4 million negative impact from waste and service fee contract transitions in the quarter. Beyond these discrete items, there were a number of factors, both positive and negative, that netted to a positive $7 million impact in the quarter. The most significant driver was the benefit of our cost saving and efficiency initiatives. This was seen particularly in the maintenance expense line with the implementation of the outage efficiency programs as Steve mentioned earlier benefiting us in our heaviest maintenance outage quarter. This was offset somewhat by lower contribution from the biomass facilities. Turning to slide 12, free cash flow was $16 million in the first quarter compared to $67 million in Q1 last year. Free cash flow was impacted by the decline in adjusted EBITDA that I just mentioned as well as an increase in cash interest payments, primarily related to the timing of the new coupon payments for the $400 million of high yield notes that we issued last spring. Maintenance CapEx increased by $1 million year-over-year on an apple-to-apple basis with the previous accounting method for maintenance at publicly-owned facilities. However, note that reported maintenance CapEx in the quarter under the new accounting method shows decline of $10 million due to the reclassification that I described earlier. We saw significant cash out flow in the quarter related to working capital which drove most of the year-over-year decline in free cash flow. As implied by our annual free cash flow guidance which we affirmed yesterday, we expect free cash flow to be heavily weighted towards the back half of the year based on our normal seasonal trend in operating results, as well as an expected reversal of working capital later in the year. Now, I'll move on to our growth investment activity and outlook, please turn to slide 13. We spent $16 million on investments for organic growth in the first quarter, including spend on the emissions control system at the Essex County facility and some continued investments in various metal recovery projects. We also continued to invest in infrastructure to support the New York City contract, spending an additional $13 million in the quarter. Construction of the Dublin facility is on track and we spent $31 million in the quarter. This large project will acquire significant capital investment over the course of the year. However, I'll note that at this point, we have now invested the full amount of our equity into the project and have begun funding construction activities with the non-recourse project level financing. All in, we're planning to invest between $290 million and $340 million in 2015 towards growth projects based on currently identified and committed projects. As we've said in the past, to the extent that we secure new investment opportunities that meet our return thresholds, either acquisitions or CapEx, we'll revise this outlook as the year progresses. Turning to slide 14, I'll review our debt structure. Net debt was approximately $2.1 billion at March 31. The net debt to adjusted EBTIDA ratio ticked up to 4.5 times from 4.3 times at year end as we utilized cash balances and revolver borrowings to fund investment activity in the quarter, and also adjusted EBITDA was lower in Q1 2015 versus Q1 of 2014. This modest increase in leverage was expected as we mentioned last quarter. After the quarter closed, we amended our senior secured credit facilities at the Covanta Energy level. We extended and re-priced the majority of our $1 billion revolver, lowering interest margin and further extending maturity to 2020. We also refinanced the existing institutional Term Loan B due 2019 with a new $200 million bank-funded Term Loan A, due 2020, also at a lower interest margin. All in, the reduced pricing on both facilities represents annual cash interest savings of about $3 million. This transaction doesn't represent a significant change to our capital structure, but it's simply another example of where we seek to optimize our balance sheet stability, flexibility and cost of funding opportunistically based on favorable market conditions. In closing, we've had a strong start to the year and the business is running well. Notwithstanding the current commodity price environment, we feel very satisfied with our results for the quarter and are specially excited looking forward both for how the business is positioned to continue to deliver consistent results as well as for the meaningful drivers that we see for long-term growth and shareholder value accretion. With that, Rocco, please open the lines for questions.

[Operator:]

Absolutely. We'll now begin the question-and-answer session. Our first question comes from Tyler Brown of Raymond James. Please go ahead.

[Patrick Tyler Brown:]

Hey, good morning, guys.

[Bradford J. Helgeson:]

Good morning, Tyler.

[Stephen J. Jones:]

Good morning.

[Patrick Tyler Brown:]

Hey, so over the past couple of days there has been some articles talking about New York City looking to reduce their waste generation, I guess revamped their recycling efforts and I guess ultimately reduced the amount of landfill waste, but I am just curious of a couple of things. So first, just assuming that there is more diversion and volumes actually do decline, how is your contract protected given the capital investments? And then, two, may be thinking about it more glass half-full, do you think that these efforts to move to zero landfilling actually opens up more opportunities as EfW could prove a solution here?

[Stephen J. Jones:]

Yes, Tyler, this is Steve. Our contract has a fixed service fee formula to it. So no matter – really no matter what the volume is, this covers capital and base operating costs and also has an embedded return. So, this is a little different than our – kind of our normal put or pay contracts, but it's the same general concept and that we have protection in terms of our investment, the way the contract's set up. It's interesting you brought up the zero waste going to landfills; we applauded that quite frankly. The Mayor's statement expressly stated that that was one of the additional goals, is zero waste to landfills by 2013 (sic) [2030]. And Energy-from-Waste is one of the key solutions in achieving that goal. So we were really pleased to see that and we think that presents opportunities for us, obviously.

[Patrick Tyler Brown:]

Okay. Perfect. Second question here and, Steve, maybe this is a little more for you but, you've been here for a couple of months and I'm just curious to get your take on let's just call it the state of the fleet. So I know you've got a lot of experience running plants but how do you view the fleet in terms of its condition? And then you did touch on this, but can you give any specific areas where you might be looking to reduce, call it a per unit operating cost, or maybe improve boiler availability or just maybe lower maintenance expense overall?

[Stephen J. Jones:]

Yes, so, I think the fleet's in good shape and you can see from a cost standpoint in Q1 here, our maintenance expenses are down. And we continue to be maintaining the facilities but I think we've done a good job over the years of maintaining them and we're seeing a fleet that's in good shape. So I've been pleased by that. Going forward, we have, and one of the reasons you look at maintenance expenses and why they're trending down, is that we have an outage optimization program that we've instituted and the team's done a good job at looking how we conduct outages, what work do we do, how quickly can we do it, leveraging our vendors associated with, who provides services during those outages and continue to drive the cost of outages down. So, our efficiency around outages, if you will, has gotten better. And so, going forward, we're going to apply some of those same concepts to everything we do. I talked about efficiency and initiatives around that. You look at tools like Lean and Six Sigma and how you apply those to complicated operating assets like we have. I think there's opportunities going forward to apply those types of tools and we're looking at that now and seeing where we can apply those things – those methodologies.

[Patrick Tyler Brown:]

All right. Perfect. I'll hop back in the queue.

[Stephen J. Jones:]

Thanks, Tyler.

[Operator:]

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

[Scott J. Levine:]

Hey, good morning, guys.

[Bradford J. Helgeson:]

Good morning.

[Stephen J. Jones:]

Good morning, Scott.

[Scott J. Levine:]

So, I guess, I'd ask Steve, firstly, you've been there for a handful of months now. I think you've commented with regard to your perspective on the operational attributes of the business stature, but I guess I'd ask for maybe a little bit more depth in just your perspectives and take on how the experience thus far is kind of compared to what your initial expectations were in any areas where you may be more optimistic or even more concerned about the operations going forward, just looking for more color there?

[Stephen J. Jones:]

One area that's really impressed me is the growth opportunities. So, I think there are a lot of growth opportunities to grow the business and more than I had anticipated. I can't really get into a lot of specifics because I don't want to telegraph to our competitors what our strategy is. But for example, you heard me talk about these irreplaceable Energy-from-Waste facilities. They make up a strong backbone around the world and I think our opportunity is how we use these irreplaceable facilities to provide more services and solutions in the waste area for customers. And we're kind of formulating now how we want to do that. There's also going to be bolt-on acquisitions in North America to support our portfolio. There's technologies to improve the performance of our existing facilities. And I mentioned with Tyler, some of those, Lean, Six Sigma, how they bring some of those capabilities to bear around, both our facilities and then also how we conduct business. I mean those types of tools are applicable to all facets of the activities that a company conducts. There's going to be a continued push on organic growth initiatives, so for example, we just talked about the Long Beach extension, how do we continue to do things with clients? And then really, other geographies for both development and acquisition, I think, are real opportunity. Places like Australia, Asia, Europe – they all have favorable regulatory and public policy support for Energy-from-Waste. And Covanta being a world leader, and recognized world leader in Energy-from-Waste, we have the right to play in some of these geographies. Now, we got to make sure the returns meet our expectations, but – that kind of whole set of growth opportunities is greater than I had anticipated.

[Scott J. Levine:]

Understood, thanks. Then as a follow-up, maybe, for Brad, you mentioned a slight click up in the leverage and that was expected there. Just maybe a little bit more color regarding your thoughts on the balance sheet, I know you indicated last quarter, you will evaluate the dividend towards the end of the year, going forward, is it a situation where if the leverage does trend up with growth CapEx this year, maybe just some color on your thoughts on the potential for additional capital returns or investment with the debt levels, where they are today and where expecting to be at year end?

[Bradford J. Helgeson:]

Yes, sure. We are very comfortable with the balance sheet right now and sort of that we have the capacity for leverage to tick up further as we're continuing to deploy capital in the long-term investments. I think it would be short sided for us to thing about long-term capital allocation based on the current leverage given that leverage are ticking up because we're investing in projects that haven't begun contributing to EBITDA or cash flowing yet. So, that'll – all of being equal, that'll normalize over time, and leverage will come down naturally as the contribution from those investments hits the bottom line. So when we get to the end of the year as we've talked about, we're going to assess the dividend in December. When we get to that point, we'll look at the state of the business. We'll look at our balance sheet. We'll look at the markets and we'll look at our outlook for the coming years and decide what an appropriate dividend level should be based on that outlook. But, the short answer is, there is nothing about whether we're at 4.3 times or 4.5 times or even a little higher. There's really nothing there that given the nature of why the leverage is ticking up. There is nothing there that would materially impact our thinking.

[Scott J. Levine:]

Understood. Thank you.

[Bradford J. Helgeson:]

Thanks.

[Stephen J. Jones:]

Thanks, Scott.

[Operator:]

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

[Daniel Mannes:]

Thanks. Good morning, everyone.

[Bradford J. Helgeson:]

Good morning, Dan.

[Stephen J. Jones:]

Good morning.

[Daniel Mannes:]

Quick question I guess for Steve, you talked obviously about the cost side. You talked a little bit about maybe some of the international development. Can you maybe – and I know it's premature, but I'm going to ask anyways, can you maybe help us think through, maybe Covanta's previous strategies related to international development, maybe versus what you could see or alternatively what you've experienced in the past that might be a little bit of a quicker and faster market?

[Stephen J. Jones:]

Yes, so, I mean we'll look at both acquisitions and business development and they both have their advantages and their disadvantages. I think if you look at business development, for example, I think you have to be, and this is what I've been talking to folks about; you have to be kind of diligent in your burn rate around business development resources. If you ramp up too fast for the market, then your burn rate gets too high. And if you don't land a couple of projects, there's going to be a lot of pressure to kind of go in the other direction. So, we're trying to be balanced around that, Dan. If you look at places like – pick China for example, and it's a good example because there's a lot of risk about doing business development in China and you got to make sure you're going to get the right returns. But if you look at the Chinese market and the 13th Five-Year Plan which the government is just kind of putting in place now, there's going to be a lot of support for Energy-from-Waste, which means that's going to be a pretty active market for the next five years to ten years. It's already been active and we've got pretty good experience over there with our partner. And so that's an area that we'll look at, and the reason I bring China up is, it's got multiple opportunities. The other thing I've been impressing on people is, I don't want to have the orphan plant which is one plant in one jurisdiction and then it gets harder to kind of manage that plant, and so you want to have multiple plant opportunities when you're looking at business development and your activities. Now, on the acquisition side, again, that's got its own kind of risk and rewards. We'll look at properties as they come on the market. Again being kind of the world leader in Energy-from-Waste, I think, people kind of reach out to us when these properties come on the market and we'll certainly be interested in looking at them from time to time, so...

[Daniel Mannes:]

If I can just follow-up there. Does your comment on orphan, is there a read-through there to Dublin that shows that there – I don't want to say an inclination, but certainly a willingness, to either look at M&A or I don't know how much development is left either in Mainland Europe or potentially U.K. again?

[Stephen J. Jones:]

Yes. So each market is a little different, right? So I think if you look at – we think there's other opportunities in Ireland for example. So I think Dublin is a great project and really sets this up nicely for that. If you look at the U.K., there's still development opportunities that market's migrated a little bit further and a little more mature and I think from time to time there should be opportunities for M&A in places like the U.K.

[Daniel Mannes:]

Great. Thanks so much.

[Stephen J. Jones:]

Yes. Thank you, Dan.

[Bradford J. Helgeson:]

Thanks, Dan.

[Operator:]

Our next question comes from Ben Kallo of Robert W. Baird. Please go ahead.

[Ben J. Kallo:]

Thanks for taking my questions. Hi, Stephen. Could you just discuss possibly the – any early way to quantify additional cost savings or efficiencies doing the Six Sigma?

[Stephen J. Jones:]

Ben, I'm not – yes, there's a lot of different metrics around that. We're just at the early stages of that. So I don't have a good number yet, but certainly as we look at this – and I'm working with our operations team – but realize, too, and this has come up a lot internally, everybody thinks this is operations-focused. Lean Six Sigma applies across the board. I've been joking around with our General Counsel that I'm going to be applying Lean Six Sigma to the legal function, but it does, it applies everywhere. And so as we start to get further into this, we'll put together some ideas on what we think the potential savings are, but I don't really have a good number for you right now, Ben.

[Ben J. Kallo:]

Okay. You talked about the growth opportunities, anything in your portfolio that you see of plants maybe specifically the biomass that you look to divest, maybe not see them as core assets from your perspective?

[Bradford J. Helgeson:]

Yes, that's something we may look at.

[Ben J. Kallo:]

Okay, great. Thanks, guys.

[Stephen J. Jones:]

See, I mean we have some of those biomass plants, three of them are running right now. Two in – Maine, one in California. So they are in operations, but we'll look at our portfolio and see what's still core and what other areas may not be so core.

[Ben J. Kallo:]

Got it. Thank you.

[Stephen J. Jones:]

Thank you.

[Operator:]

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

[Michael E. Hoffman:]

Hi. Thank you, gentlemen, for taking my call this morning.

[Stephen J. Jones:]

Hello, Michael.

[Michael E. Hoffman:]

Hi, guys. Starting maybe, Brad, with you on cash flow from ops and working capital timing and sort of risk, can you talk about what you see as the challenges to make the goal of $280 million to $330 million of the starting point of where we are in the first quarter and things that are in your – very comfortable in your controlled shift that working capital would be a positive source of cash to help that trend?

[Bradford J. Helgeson:]

Yes. Well, I mean, working capital was a positive source of cash in the first quarter though much less than it was in the comparable period, so the negative anniversary comp. But I would say frankly everything is in our control other than the elements of our business that we don't necessarily control which is where we're a price-taker on electricity prices and metals prices. Everything else is about operations and working capital; I don't see any particular risks to that for the rest of the year in terms of hitting our full year guidance, just because it's with the Durham York project winding down we're going to be evolving into what could be viewed as more of a typical working capital environment for Covanta.

[Michael E. Hoffman:]

Okay, and I think that was probably the most significant thing I want to pull out of that. And then, Steve, on the capital spending maintenance, and this is kind of a Steve/Brad question, it's got couple of pieces to it. The shift because of FASB, there's a couple of parts to this; one, you spent less regardless to the shift and that's partly the things that were there before you got there or is that – are there programs you initiated in your first four months that have contributed to the spend less? And then as I think of 2016, 2017, 2018, I wish to just take $30 million out of my cap spending in 2016, 2017, 2018, plus any inflation shifted up into the income statement and that's the way to think about it, because it's focused on service fee only and those aren't going to convert, right? I mean that's the way – that's kind of a long-term permanent change.

[Stephen J. Jones:]

Yes, so I'll deal with the first question. Brad will – first part of the question and Brad will take the second part. On the first part, before I got here, so I want to give credit to the team. We were working on an outage optimization program and I mentioned it briefly and that's up – the benefits of that program are coming to bear and I mentioned them. So, we're doing more centralized planning around outages you can think about. We have 46 plants and the outages weren't so centralized – so much centralized – there wasn't much central control, excuse me. And when you get more central control you start to plan better resources. You're able to buy parts with more leverage on vendors. You're able to get services. So, for example, with vendors, if you can promise them work across multiple plants, you get volume discounts. And so, they're the types of things with our outage optimization program that we just put in place. And this is the first outage season that we've implemented some of these and you can imagine, being the first one, I think we have more room for upside because we're just starting to get good at it. And so that will all come to bear, I think, over time as we get better in this particular area. Brad, you might want to comment on that.

[Bradford J. Helgeson:]

Yes, and just the second, I think it's a simple answer. I think the right way to think about modeling going forward is just a straight, approximately $30 million re-class from maintenance CapEx up into the P&L.

[Michael E. Hoffman:]

So just a little bit of inflation for normal growth with that maintenance cost?

[Bradford J. Helgeson:]

Yes, I mean, $30 million is our estimate for annual based on our forecast for that spend for this year.

[Michael E. Hoffman:]

Okay.

[Bradford J. Helgeson:]

So, yes, that could move up or down as it otherwise would, based on maintenance schedules and so on.

[Michael E. Hoffman:]

All right, and if you would bear with me, Steve, just to pull on the thread of your answer...

[Stephen J. Jones:]

Yes.

[Michael E. Hoffman:]

...part of the previous question about, can you target incremental savings. Covanta's pretty good at offsetting about $15 million to $20 million a year in pushes and pulls around productivity, so I'm presuming that the target is you could do better than that. That's the idea.

[Stephen J. Jones:]

Yes, absolutely.

[Michael E. Hoffman:]

Right.

[Stephen J. Jones:]

I think there is more upside there.

[Michael E. Hoffman:]

Okay, great. Thanks.

[Operator:]

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

[JinMing Liu:]

Good morning. Thanks for taking my question.

[Bradford J. Helgeson:]

Good morning.

[Stephen J. Jones:]

Good morning, JinMing.

[JinMing Liu:]

Yes, Steve, just a question for you. Given your intention for international expansion and some potential acquisition, and the – just about whether you're going to look at other technologies comparing to what your existing technology, such as gasification for using waste?

[Stephen J. Jones:]

Yes. I mean, we get a lot of inquiries and requests to partner with people around a lot of different types of gasifications. As you probably know, and I think we just got a patent the other day on some gasification work that we've done, we've got some of our own technology around gasification. And as you well know, JinMing, there's a lot of gasification technologies out there. So we're keeping a pretty close eye on the gasification market at this point. We like our technology; we've got a pilot plant in China that's in operation and we continue to operate that to learn more about the gasification world and the efficiencies around gasification and the capital costs. And as I said, we're continuing to kind of look at this part of the market. Obviously, there's different technologies out there and we'd be kind of fooling ourselves if we didn't keep an eye on what's coming next down the pike.

[JinMing Liu:]

Okay. But you are not going to acquire some technology, just use whatever you develop in-house?

[Stephen J. Jones:]

We'll look at everything. I guess we're developing some technology in-house, but if there are other technologies that came along that were better, more efficient, reduce capital cost, I mean, we'd certainly look at those.

[JinMing Liu:]

Okay, got that. Thanks.

[Stephen J. Jones:]

Thanks, JinMing.

[Bradford J. Helgeson:]

Thank you.

[Operator:]

Our next question comes from Tyler Brown – is a follow-up from Tyler Brown of Raymond James. Please go ahead.

[Patrick Tyler Brown:]

Hey, thanks for taking the follow-up here. So, Brad, just real quick, I'm just curious if you could walk us through some of the PPA transitions that kind of come up through the end of the decade. So you guys have talked about 1 million megawatt hours coming off PPA. They're moving to market and you say in your appendix they're about $57 a megawatt hour. And if you look at those old American Ref-Fuel filings, you can see that that New England is well above the $57 and I think those roll off in 2017. So should we think about these transitions bearing most of the EBITDA brunt in 2017 and maybe you actually get some benefit from some of the other megawatt hours that come off or how do we think about that?

[Bradford J. Helgeson:]

Yes, your research is accurate. We do have some above market PPAs in New England that'll be expiring in that timeframe. So, as we've talked about in the past, as we look forward and we'll not get into really any real specific detail on this, but we've said that we view the contract transitions from this point forward as being essentially neutral. We see 2016 as a benefit based on the Fairfax transition, which I think everyone knows about. And then 2017, we have some PPA transitions that are going the other way. Beyond that, it's a bit far to start to speculate, but certainly that's what we see at this point for at least the next two years.

[Patrick Tyler Brown:]

Okay, yes, no, that's really good color and then just real quick, maybe on cash flow, maybe I missed it but did you guys provide guidance on cash tax this year?

[Bradford J. Helgeson:]

Yes, $5 million to $10 million.

[Patrick Tyler Brown:]

Okay. Perfect. Thanks.

[Operator:]

Our next question comes from Barbara Noverini of Morningstar. Please go ahead. Hello, Barbara, your line is live now. Ms. Noverini, is your line on mute, ma'am?

[Barbara Noverini:]

Good morning, everybody.

[Stephen J. Jones:]

Oh, hey, Barbara.

[Barbara Noverini:]

With activity in Niagara predicated upon rail yard construction, is your development there on track with your expectations? Are there any lingering challenges that could delay completion of the facility?

[Stephen J. Jones:]

No, we feel good about the Niagara activities. I think we just saw it up to general contractor and we are expecting that project to kind of move ahead now. The winter was tough right so, tough winter up there but I think we are in reasonably good shape now.

[Barbara Noverini:]

Okay. Thank you.

[Stephen J. Jones:]

Thank you.

[Operator:]

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

[Stephen J. Jones:]

Well, I just want to thank everybody for joining us today and we look forward to seeing you next quarter. Thanks again for taking the time.

[Operator:]

And thank you, sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect and have a great day.