Covanta Holding Corporation
Q3 2015 Earnings Call Transcript

Published: 28 Oct 2015

[Operator:]

Good morning, everyone, and welcome to the Covanta Holding Corporation's Third 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, 10073716. 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.

[Alan Katz:]

Thank you and good morning. Welcome to Covanta's third quarter 2015 conference call. Joining me on the call today will be Steve Jones, our President and CEO; and Brad Helgeson, our CFO. We'll provide an operational and business update, review our financial results and then take your questions. During their prepared remarks, 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, October 28, 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 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, Steve Jones. Steve?

[Stephen J. Jones:]

Thanks, Alan, and good morning, everyone. For those of you using the web deck, please turn to slide three. Before getting into details on our operations and markets, I'll start with a brief overview of our financial results during the quarter and an update on the progress that we've made on a few of our strategic initiatives. Q3 adjusted EBITDA was $139 million and free cash flow was $107 million. Brad will go through the factors that drove the results to more detail, but I'll quickly highlight a few things. Operationally, we had another strong quarter with waste, energy and metals volumes coming in right on target. In addition, the continued growth in our new Covanta Environmental Solutions business, the ramp of our New York City contract and the benefit of cost savings initiatives implemented over the past 12 months helped to grow adjusted EBITDA compared with last year. However, this growth was somewhat muted by the impact of contract transitions on the waste revenue line as expected and the continued impact of lower prices in the energy and metals markets. Regarding a few of our strategic initiatives, I'm pleased to note that we made several acquisitions in the environmental services space since last quarter. We commenced operations at our Fairless Hills metals processing facility in Pennsylvania, and we formally established a group to drive continuous improvement across the company, hiring a Vice President of Continuous Improvement to lead the effort and kicking off several projects. Now let's move on to the markets and operations. I'll start with the waste business. Please turn to slide four. First, our New York City client continues to ramp up volumes at the Queens MTS and we're on track to achieve the expected full run rate volumes by the end of the year. This quarter, we began accepting waste containers at our rail transfer facility in Niagara, and so both our Niagara and Delaware Valley facilities are now processing waste under the contract. In late September, we announced the acquisitions of Chesapeake Waste Services and Waste Recovery Systems, which continued our expansion into the environmental service sector, specifically establishing a presence for us in the Mid-Atlantic region with the addition of several facility locations in Pennsylvania. I'm also pleased to announce that we just completed another small acquisition earlier this month in upstate New York, to support the robust profiled waste program at our Niagara facility. We've now made five acquisitions to-date under our new subsidiary Covanta Environmental Solutions. These businesses, along with our traditional profiled waste disposal business, now account for more than $150 million in annualized revenues. Combined they generate adjusted EBITDA margins that are similar, if not better than our corporate margins, with Profiled Waste Disposal coming in much higher and Environmental Services coming in a bit lower. Given the other tuck-in M&A opportunities that we see in the market and our organic growth projections for this business, as we said at our Analyst Day, our expectation is that Environmental Solutions Group should be a $250 million to $300 million revenue business in the next three years to five years at similar margins to our corporate average. In terms of price and volume for the quarter, Q3 was right in line with our expectations. Revenue related to waste volumes was slightly lower compared with Q3 2014, as a result of maintenance activity at some of our larger merchant facilities. Same-store pricing was up 2.7%. While inflation linked contract escalation remains very low, the growth in higher priced profiled waste continues to drive price favorably. In fact, this was yet another record quarter of profiled waste revenue. Overall waste revenue per ton was lower year-on-year, as a result of the contract transitions that we discussed. Now let's move on to energy. Please turn to slide five. Q3 North American Energy-from-Waste energy revenue was down 3%, versus the same quarter last year. Lower market pricing was partially offset by increased volume, as a result of an increase in energy revenue share from contract transitions and the addition of the Pinellas operating contracts. Let's spend a few minutes on the metals business. I'm now on slide six. Market pricing continues to have a significant impact on metals revenues year-over-year. The average price for the HMS #1 Index was $219 per ton in Q3 versus $358 in the same quarter last year. The October HMS #1 Index pricing just came in at $190 per ton compared with $348 per ton in October 2014. Given the recent market pressure, we now expect the HMS #1 Index price to be below $200 per ton for the rest of the year, leaving us with an average of approximately $215 per ton for the full year. Overall, same-store metal pricing for Q3 2015 was down 47% year-over-year. On a same-store basis, ferrous volume declined slightly this quarter as a result of an increase in number of outages at some of our larger merchant facilities as well as the impact on the volume of ferrous metal after it goes through cleaning and processing at our new regional ferrous processing facility. Further processing benefits ferrous metal revenue by increasing our price point, but it does negatively impact the volume statics. In effect, the weight of the metal decreases when you clean it up. We're getting rid of the non-metallic residue that is left on the metal after it comes through the Energy-from-Waste process. Non-ferrous volume increased versus Q3 2014 on a same-store basis, driven by investments made to increase recovery at certain facilities. Despite the lower market pricing, we are doing several things to squeeze the most value from our metal and capture a greater percent of the index, which has been under some pressure recently. This is similar to what we've done over the past couple of years but on a larger scale. As I mentioned in August, we started up a regional ferrous metal processing facility in Fairless Hills, Pennsylvania. This is an impressive system that cleans and sorts ferrous metal from a number of facilities in Pennsylvania, New York and New Jersey and creates a more attractive product for the market commanding a higher price. Fairless Hills is also a great location in that we have port access, which should provide us with the ability to ship metal directly to overseas buyers and take advantage of lower transportation cost by storing the metal until it's ready for shipments in larger quantities, so bulk shipments. This ability to store metal also allow us to manage better any seasonal fluctuations in the markets. As this facility hits full run rate over the next few months, this should help mitigate some of the decline in market prices. In the future you may see the impact of consolidating metals inventory in the quarterly fluctuation of reported metals volume sold, but this will just be timing as we use these new capabilities to optimize the value of the product. Forward prices of the recycled aluminum continued to decline in Q3 but seem to have stabilized now. We've adjusted our outlook for the full year non-ferrous price to reflect this, and now expect to be at approximately $735 per ton. As you recall, last quarter we expected metal pricing to impact full year results by $10 million, but due to a further decline in market pricing, we now expect a $20 million negative impact for 2015 versus where we gave guidance at the start of the year. In total, year-over-year, that's a $40 million decline from pricing alone. We had anticipated a weak ferrous market this year, but candidly the severity of the decline in the market has exceeded our most pessimistic forward-looking scenarios. While it's always danger to try to call a bottom, we feel like we're approaching one now. How long we stay here is another question, but it's hard to be very bullish in the near term. Let's now move on to operating expenses and CapEx. Please turn to slide seven. Total Energy-from-Waste maintenance spend in the quarter, including both expense and CapEx, was down 10% versus Q3 2014. This was driven primarily by the maintenance CapEx line, which was lower as a result of relatively higher outage scope in Q3 last year, but also realizing the benefits of our outage efficiency initiatives. For the full year, we now expect to be towards the midpoint of our Energy-from-Waste maintenance spend range, which we've narrowed a bit to $330 million to $345 million. We had previously indicated a trend towards the bottom of the range for the year, but we had some additional maintenance at a few larger merchant facilities in the quarter, and we've also identified and scheduled some additional maintenance projects for Q4. North American Energy-from-Waste, other plant operating expenses were up 2% on a same-store basis this quarter, compared with Q3 2014, generally in line with the anticipated cost escalations. In 2015, we continue to see the benefit of our efficiency initiatives and we still expect to see a $30 million impact from these efforts this year. But as I mentioned last quarter at our Analyst Day, a key point of focus for me is to develop a culture of continuous improvement. So in effect moving from a one-time program to one that is ongoing. These practices drive efficiencies across the operations and help to offset growth on the cost line. To that end, in addition to the Vice President of Continuous Improvement that was hired to lead this initiative, we brought on some other people to help drive results in this area. In fact, the Continuous Improvement group is already conducting projects at our Energy-from-Waste facility in Haverhill, Massachusetts, where we intend to start to develop a blueprint to be rolled out across the fleet. They're working with the operating team to cover the quick hitters first. I'll note that there will be some additional G&A expenses associated with establishing this group and starting these projects, but this will quickly pay for itself many times over. Moving on, I'll spend a few minutes discussing our business outlook for the rest of the year and beyond. Please turn to slide eight. Our core business is running extremely well and we're hitting all of our targets this year from an operating perspective. We're generating record revenue again in profiled waste and making great progress in building our environmental solutions platform. In New York City, MTS operations are in track to be fully ramped by the end of the year, and of course, completing the testing and commissioning phase of the Durham-York project is a critical priority. Like any other business with commodity exposure, we're feeling the impact of the markets right now. The good news is that the majority of our revenue both waste and energy is under long-term contract. We also seek to mitigate our exposure to near and medium-term energy price volatility through our hedging program. We remain exposed on our recycled metal sales, but our Fairless processing facility should enable us to better manage that business, especially in a weak price environment. And we'll look to develop similar operations in other geographies. I'd like to comment for a minute on what we're seeing ahead of us for next year. Given the continued price decline in commodity prices and in particular, our outlook for scrap metal market, we expect 2016 to be more challenging than our prior expectations. The positive drivers that we discuss for next year are still very much intact. We expect to realize benefits from contract transitions, a full year of the New York City contract, growth in our profiled waste business, and the Durham-York facility moving to profitable commercial operations. But the scrap metal market has taken another leg down in the fourth quarter. We don't believe that these prices are sustainable for the long-term. However, if we see this drag on for a while then it will definitely impact us next year. We'll talk about guidance ranges for 2016 in February when we report fourth quarter results, consistent with our normal practice. So we'll assess the markets at that time, discuss more specifically how we'll be impacted. So it's premature to do that now. But I want to make sure that preliminary expectations are appropriately calibrated. At our Analyst Day in August, I said that we anticipated 2016 results to be meaningfully higher than 2015. On the adjusted EBITDA line that could be a challenge depending on commodity. Free cash flow though is a completely different story. Regardless of the factors impacting adjusted EBITDA, we'll see a significant increase in free cash flow year-over-year as the working capital outflows in 2015 reverse next year. Brad will walk you through some of the important factors that we expect to impact 2016 in a little more detail in a few minutes. Let me make one final point on this topic, which I think is important. About two-thirds of our revenues are generated from the waste area of our portfolio. And we're seeing solid trends in that area. More importantly in the growth part of the waste business, profiled waste, we expect strong mid-teens revenue growth, and we're seeing strong pricing. We're excited about this part of the business and it's one of the reasons we've been investing in the Environmental Solutions Group. I think some of our peers in the waste space feel the same way about the waste fundamentals. In our markets, generally waste volumes have been stronger and pricing appears disciplined. One question that I imagine many of you have is how these difficult commodity conditions could impact our dividend. As Brad discussed at our Analyst Day, our baseline free cash flow remains strong and supports our capital allocation priorities regardless of commodity prices. I want to be clear on this. We have a very high degree of confidence in our dividend, and we expect to grow it sustainably over the long term. And we will remain focused on our strategic growth priorities that create value for shareholders regardless of what the commodity markets are doing. These include driving continuous improvement to reduce cost in the business, leveraging our unique and unmatched asset base to generate growth in a broader environmental solutions platform and pursuing and executing on domestic and international development opportunities. Speaking of international opportunities, the Dublin project construction is on track and was 33% complete as of the end of Q3. We're currently finalizing contract terms with a number of waste suppliers and the market has been entirely consistent with our expectations. We continue to see other opportunities abroad though we don't have any updates on any other development projects today. Rest assure that when we do we'll highlight them for you in the coming quarters. With that, I'll turn the call to Brad to discuss the third quarter financial results and our financial outlook in more detail.

[Bradford J. Helgeson:]

Thanks, Steve. Good morning, everyone. I'll begin my review of our financial performance in the third quarter with revenue on slide 10. Revenue was $422 million, up $8 million versus Q3 2014. North America Energy-from-Waste revenue declined to $10 million year-over-year on a same-store basis, primarily, driven by lower commodity prices. Within that amount, waste and service revenue increased by $6 million, driven by higher prices from the continued growth of our profiled waste business. However, energy revenue declined by $5 million and recycled metal revenue declined by $11 million, both driven by lower year-over-year prices. EfW contract transitions were net negative $3 million year-over-year, which included a $2 million decline in debt service revenue. EfW transactions or net new business, increased by $3 million compared with the same quarter last year. This increase was driven by the contribution from the Pinellas County facility operating contract, partially offset by the conversion of our Wallingford facility into a transfer station in March of this year. Outside of North America EfW operations, construction revenue was flat year-over-year with lower revenues from Durham-York, offset by a few other smaller construction projects at existing publicly-owned facilities. All other operations were up $18 million, with the transportation and logistics component of the New York City MTS contract and revenues from the newly acquired environmental services businesses partially offset by lower biomass revenues. Moving onto slide 11, adjusted EBITDA was $139 million in Q3 2015, compared to $135 million in the same quarter last year. The year-over-year increase was driven primarily by the Environmental Solutions business including both acquisitions and growth in profiled waste into the EfW facilities, contribution from the New York City MTS contract and lower variable incentive compensation expense. These are the most significant items presented in the other category. Lower energy and recycled metal prices in North America EfW business impacted EBITDA by $16 million in the quarter, which limited year-over-year growth. We also had a $3 million year-over-year impact from waste and service fee contract transitions in the quarter. Turning to slide 12, free cash flow was $107 million in the third quarter, compared to $104 million in Q3 last year. The increase in adjusted EBITDA was essentially offset by an increase in maintenance CapEx this quarter. Similar to last quarter, we presented this delta under the previous accounting method for maintenance at publicly-owned facilities, so that it's apples-to-apples with last year and our calculation of adjusted EBITDA. Under the new accounting method that we've described the last two quarters, the maintenance CapEx would have decreased by $1 million as you can see on slide seven. Now, we'll move on to our growth investment activity and outlook. Please turn to slide 13. We've invested $27 million in organic growth so far this year. This is primarily associated with the metal recovery projects such as the regional metal processing facilities, Steve, just spoke about and the stainless steel recovery system that we highlighted at our Analyst Day. We now expect to spend about $35 million on organic growth this year mostly on metals opportunities. We continue to invest in the infrastructure to support the New York City contract and in the emissions control system at the Essex County facility this quarter. We've invested $28 million and $18 million respectively year-to-date. We completed the acquisitions of Waste Recovery Solutions and Chesapeake Waste Solutions in the quarter for $22 million in total. Overall we've invested approximately $85 million in acquisitions in this space over the past year, which will contribute over $80 million of revenue annually. We spent $123 million on Dublin facility construction through Q3, and now expect that we will spend between $150 million and $175 million in 2015. I'll note that Dublin CapEx booked in any period can be based on the timing of large vendor payments, so there is a potential range around that number, and our forecasted spend for this calendar year has come down a bit as a result. But as Steve described, the project is right on track. All-in we're now planning to invest between $320 million and $350 million in 2015 towards currently indentified and committed growth projects. However, as I pointed out last quarter, the requirement of domestic corporate cash for these investments is far smaller than this total amount. The Dublin project construction is now being funded completely by project subsidiary financing and the Essex facility upgrade is now being funded from proceeds of a tax-exempt bond offering, which I'll describe in a minute. Subject to any further opportunistic acquisition activity, we expect limited further investment from corporate cash for the balance of this year. Turning to slide 14, and a current snapshot of our debt structure, net debt was approximately $2.3 billion as of September 30. The net debt to adjusted EBITDA ratio was at 5.3 times flat with last quarter. As we've said before, leverage will remain elevated until we have full contribution from the growth projects where we've utilized debt to make sound long term investments. Then it should come back down towards our long term target of approximately 4 times. We issued $130 million of long-term corporate tax-exempt bonds in the quarter. $90 million of 30-year bonds at 5.25% to fund the Essex facility upgrades and $40 million of 28-year bonds at 5% to refinance outstanding variable rate corporate notes and project debt related to the Delaware Valley facility. The tax-exempt market offers us attractive very long-term financing. We now have over $460 million of these bonds outstanding at an average cost of approximately 5% and weighted average tenor of 25 years. Our liquidity remains strong over $500 million of availability under our revolving credit facility. Next I'd like to revisit the key drivers impacting our adjusted EBITDA this year comparing our original guidance range on adjusted EBITDA to our current outlook. Based on this I'll talk about how we see this year finishing and also highlight some factors to keep in mind for thinking about next year. Please turn to slide 15. When we revised guidance last quarter, it was primarily driven by two specific issues. The decline in commodity prices since the beginning of the year and the delayed start-up of the Durham-York project. Since the beginning of the year recycled metal prices have declined significantly and we now expect the metal pricing to impact adjusted EBITDA by a total of $20 million in 2015 as compared to original guidance, which is about $10 million more than our expectations just last quarter. Energy prices have also declined further since the start of the year. That impact is about $10 million compared with our initial guidance ranges. The other major impact, the Durham-York facility start-up delay, is now expected to be approximately $25 million as compared to our original guidance for 2015. This consists of expenses associated with the additional work that we're doing to achieve commissioning, contractual liquidated damages associated with the delay, and the deferral of commercial operating revenue into 2016. I'll note that this is about $5 million more than our estimate as of last quarter, due to some additional expenses that we've been incurring during the start-up process. But as we said before, we expect to be in profitable commercial operations in Q1 2016, so this will be a one-time impact this year. Reduced accruals for employee incentive compensation have offset some of the impact of these declines. In summary, our employee bonus pool is set based on targets for our key metrics, adjusted EBITDA, and free cash flow. So to the extent that financial results fall short of budget as they have this year, the accrual was reduced. As of last quarter, we had expected this to be an approximately $20 million impact in 2015, but given the further decline in results from lower commodity prices, we now expect it to be approximately $30 million. Again, to be clear, this reduction in accrual is a benefit to adjusted EBITDA this year, but a benefit to free cash flow next year, as we pay bonuses in the first quarter of the following year. We have some other factors that total approximately $10 million to $20 million as compared to our original outlook. Most notably, the impact of the China sale in Q4 and very low CPI escalation on waste and service contracts. If you add this up, we're trending towards the lower end of our guidance range for 2015 for both adjusted EBITDA and free cash flow. So how will these factors impact next year? The start-up issues at Durham-York will be behind us once the facility goes operational as expected in Q1. The reduced employee incentive comp accrual is also a one-time event in 2015, but going the other way. So it will reverse as we accrue for normal target compensation levels in 2016. Commodity prices are always a variable in our business, so we seek to provide as much clarity as possible on our volumes and market exposure and let our analysts and investors make a market assessment. We'll give you our view when we provide guidance early next year. In the category of other factors, the China swap transaction will impact adjusted EBITDA year-over-year likely by between $15 million and $20 million. We're currently going through our budget process and maintenance planning for next year. We'll discuss our maintenance investment plan more specifically when we provide our guidance in February, but I can highlight now that maintenance is likely to be up year-over-year simply based on our long-term maintenance schedules and certain large plant projects. Spending will be consistent with our long term range that we've discussed in the past. Absolutely nothing has changed in that regard, but I would note that we've been at the mid-to-lower end of that range for the past two years and long term maintenance activity does move around year-to-year. Of course, we'll also have several positive drivers for growth in 2016 that we've discussed in the past and Steve highlighted earlier. Contract transitions, which have been a headwind for a long time turn around next year as the Fairfax facility contributes meaningfully to our energy portfolio. We expect to realize a full year of the New York City MTS contract at run rate waste volumes and our Environmental Solutions business is expanding nicely as we build an attractive suite of services and value proposition for our growing industrial customer base. We also remain very focused on the cost line and we'll look to drive improvement from the Lean and Six Sigma programs that Steve discussed at our Analyst Day. We aren't ready to size that opportunity for 2016 quite yet, but we'll have some expectations of savings that we'll share with you when we give guidance. Overall, we're focused on those things that we can control and our team is building significant long-term value in these areas. And most importantly, the core business is running well operationally, so the prospects for this business remain strong both next year and in the long-term. With that, operator, let's open the line for questions.

[Operator:]

We will now begin the question-and-answer session. The first question comes from Tyler Brown of Raymond James. Please go ahead.

[P. Tyler Brown:]

Hey, good morning guys.

[Stephen J. Jones:]

Good morning.

[Bradford J. Helgeson:]

Good morning, Tyler.

[P. Tyler Brown:]

Hey, first off, nice quarter, but Brad, I was hoping to get a little more color on the bonus accrual. So I just want to make sure that I've got it right here. So basically, you are kind of under accruing by about $30 million versus what I would call "normal", this year which is helping EBITDA but next year assuming that you just accrue from normal bonuses it's going to be about a $30 million EBITDA drag in 2016 versus 2015. Is that right?

[Bradford J. Helgeson:]

That's exactly right. I'm not sure what I would add to that. That was perfect.

[P. Tyler Brown:]

Okay, okay. Just want to make sure I had that right. Now, where exactly in the P&L will that hit? Is it like 70%-30% plant ops to SG&A?

[Bradford J. Helgeson:]

Yeah. That's a pretty good estimate.

[P. Tyler Brown:]

Okay, okay, good. And then I know there is a lot of moving pieces with EBITDA next year, and maybe let's just try to get above all of that noise and focus on what really matters to me which is cash flow. But if we look at it, what are the big pieces? So if we just look at, whatever we assume free cash flow is this year, but I assume you are going to add back about $40 million from the construction revenue payment or it's some from the construction payment from Durham. And then you'll probably get a $30 million positive delta from this bonus. Is there anything else that we should think about big picture bucket wise?

[Bradford J. Helgeson:]

Well, that's – working capital is going to be the biggest single variable. I think to the extent that you are, you have your arms around the factors that are impacting adjusted EBITDA that'll cover the impacts on free cash flow more or less as well. Working capital, we're looking at an outflow this year, just related to the bonus in terms of the working capital change associated with the accrual and timing of the payments, payments for construction milestones at Durham-York. That's about a $50 million negative this year which will flip and come back to us next year. So really year-over-year, it's actually about a $100 million swing.

[P. Tyler Brown:]

Okay, okay. Perfect. And then is there anything we should think about from cash taxes or cash interest?

[Bradford J. Helgeson:]

No, no material changes there. Cash interest should be relatively static plus or minus depending on what we're doing with the balance sheet and cash taxes will remain in the sub $10 million per year range at least for the next several years as we're working our way through the NOL.

[P. Tyler Brown:]

Okay. Perfect. I'll leave it at that. Thanks, guys.

[Bradford J. Helgeson:]

Thanks.

[Stephen J. Jones:]

Thanks, Tyler

[Operator:]

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

[Michael Hoffman:]

Hi. Thank you for taking my questions. Capital allocation; thank you, Steve for making a comment on the dividend. I will interpret it as you're not cutting it, you plan to grow it. But how about the buyback? Stocks at an unusually low place, you do have room on the revolver. Are you supporting the stock through any type of buyback activity as a result of it's coming down on commodity issues and angst about the dividend?

[Bradford J. Helgeson:]

We haven't bought back any stock this year, no. We're sticking to our capital plan which includes a plan around how far we're willing to push the balance sheet to protect our credit ratings and allocating capital where we – for better or worse we decided to last year to allocate more of the capital on a permanent basis to the dividend as opposed to more variable share repurchases and in an environment where we have committed investments, which we think are great long term investments and we have the dividend there just isn't many room for share repurchase again given the plan that we have around the balance sheet.

[Stephen J. Jones:]

Over the last several years we bought back about 18% of our stock. So we're not opposed to it, but as Brad said there are some other uses for the cash over the last couple of years.

[Bradford J. Helgeson:]

I would comment Michael beyond the lack of activity year-to-date, I'll make a more sort of general forward-looking comment that as you mentioned the stock price. We always look at buying back stock as the alternative, as the easy logical alternative to instead investing in growing the company. So to the extent that the stock price is lower obviously that then becomes a higher bar for deciding to allocate to investment. This year because of the committed investments that we've made we really had the capital allocated essentially as we came into the year.

[Stephen J. Jones:]

And maybe related to that too with commodity prices, particularly metals pricing being down, we're taking a much harder look at some of the organic growth in the metals area. There's a higher bar now to jump over in order to do some of those projects. So we are factoring that into our analysis.

[Michael Hoffman:]

Okay. So then moving on to the comments about EBITDA and free cash. I'd like to ask just a directional question on EBITDA, all things being equal what you know today you would expect EBITDA to be up year-over-year. I'm not asking the level, just it's up versus the coming at the low end of revised $420 million to $460 million?

[Stephen J. Jones:]

I don't want to get into that at this point. We'll come out with guidance in February. There's several months now before we come out with guidance and we just don't have that greater visibility into the commodities markets. So I'd rather hold off until we get a few more months under our belt here.

[Bradford J. Helgeson:]

Yeah. I mean there are lot of variables, Michael that obviously will go into our outlook for next year. Markets being one and then the other elements of our – many other elements of our business will impact on it. What we really just wanted to do today was make sure that people were aware of a couple of specific items that will impact the results next year, specifically the year-over-year difference in our accrual for incentive comp and also the impact of the China sale. So we want to make sure to get that out there, but we're not really trying to preannounce any guidance for 2016.

[Stephen J. Jones:]

That's right.

[Michael Hoffman:]

Okay. On the bonus accrual, given the operating environment of today, isn't in fact particularly better on the things that you can't control. How does the bonus accrual reverse anyway? The drivers are being able to get better bonuses.

[Stephen J. Jones:]

Well, it's all a function of...

[Michael Hoffman:]

Paid out in 2017, because of accruals in 2016, why would that...

[Stephen J. Jones:]

I'm sorry. Go ahead.

[Michael Hoffman:]

No, no, go ahead, Steve. Sorry.

[Stephen J. Jones:]

I was going to say, it's all a function of setting the comp plan, so each year with the committee set the comp plan for the company. Last year, when we set the comp plan, commodity pricing was a lot higher. And as that has deteriorated through the year, that's impacted the comp plan and been able to meet the metrics under the comp plan. When we set the comp plan for 2016, we will be setting that with, and again this is part of the comp committee's job, but we'll be setting that with a lower commodity environment.

[Michael Hoffman:]

I get that, but it's by lowering the size of the jump to make it easier to jump, it doesn't mean that the bonus ought to go back to an old level. So if I'm thinking about how to adjust numbers, am I really walking back $30 million as opposed to some portion of $30 million?

[Stephen J. Jones:]

That's what we would suggest.

[Michael Hoffman:]

Okay.

[Stephen J. Jones:]

That's generally been the level at which we pay bonuses at when we meet target.

[Michael Hoffman:]

Got it.

[Bradford J. Helgeson:]

I don't know if this is the point of confusion, but the way our plan is structured, that the bonus is calculated according to annual targets which are reset annually based on the circumstances that are in place at that time, not relative to an absolute number.

[Michael Hoffman:]

Fair enough. So I have to – I should do the same things on bonus pooled adjustment is that, it will proportion around that relative adjustments?

[Bradford J. Helgeson:]

Well, I think as Steve said, probably the most straightforward thing to do is what we are telling you is that our expectation is that we'll be accruing at target bonus for next year which is $30 million.

[Stephen J. Jones:]

Right, that's probably the easiest way to think about it.

[Michael Hoffman:]

Okay, all right. Great. Thank you.

[Stephen J. Jones:]

Thanks.

[Operator:]

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

[Daniel Mannes:]

Hey, good morning, everyone.

[Stephen J. Jones:]

Good morning.

[Bradford J. Helgeson:]

Good morning, Dan.

[Daniel Mannes:]

A couple of quick follow-ups here. First, can you remind us or give us an update, number one on where China stands? And two, as you get that cash in the door, I know you talked about capital allocation broadly, but might that give you a little bit more fire power if you were going to consider doing something on the buyback front?

[Stephen J. Jones:]

So I'll let Brad talk to the second part of that. The first part, we're going through the approval process. There were several approvals that we needed in China. We've got, I think all about one at this point that we're still chasing down. So we're still expecting to get that approval and move forward with the deal by the end of the year.

[Bradford J. Helgeson:]

Yeah, and on the capital allocation, potentially, yeah, we don't expect to get cash proceeds until the early part of next year. There are two steps to this process. The first is the swap and the second is the sale. And what we'll do is, at that time we'll assess what other potential opportunities there are to invest and compare that to, as always, buying our stock. So, yes, the idea is for us to obviously to the extent that we're going ahead with this transaction to redeploy that capital in some form.

[Daniel Mannes:]

Got it. And then secondly on Fairfax, can you remind us, I mean obviously you mentioned the increased power share, which should benefit either, perhaps a little bit less today than you thought a couple of months ago. But is there also a waste side of the puzzle? And then secondly, can you maybe calibrate if there's been a change in your outlook for the benefit from that contract restructuring, maybe versus previous expectation?

[Bradford J. Helgeson:]

Yeah. There's an adjustment on the waste side, though it's pretty immaterial frankly as compared to the impact of the shift in energy share. The overall, when you factor in the shift in the energy share, the resetting of the waste price from a service fee deal to the new tip fee deal that we have with Fairfax County and then also the shifting of costs that we have previously passed through, that will now be responsible for. All-in, it's about $15 million of pickup. Now, that is pretty consistent with where our outlook has been for a while now. Prices in that market have been depressed for a while. That impact is probably half of what it was, where we're looking at a few years ago. But it's been relatively static over the last year or so.

[Daniel Mannes:]

Got it. And then if you indulge me one last one. Given the ramp in New York, number one, can you maybe help us with how close you are to the full ramp? Meaning how much is left between now and year end as you get to full? And secondly can you give us any update on the Manhattan piece?

[Stephen J. Jones:]

So we're pretty close to being fully ramped at this point. We are off, I don't know, I think 25% or so from being fully ramped. But we expect to be fully ramped by the end of the year. So we're well along that path now. On Manhattan, no update at this point from the city. I think they are still in construction and things are moving along consistent with what we've said previously.

[Daniel Mannes:]

Got it, thanks.

[Stephen J. Jones:]

There is no real update there, Dan.

[Operator:]

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

[Tyler Charles Frank:]

Hi guys. Thanks for taking the question. Can you comment...

[Stephen J. Jones:]

Hey, Tyler.

[Tyler Charles Frank:]

If you are going to slow down the organic growth investments for metals potentially, does that open the door for continued acquisitions? And can you talk a little bit about what you are seeing in the acquisition market either on the environmental solution side or on more of the energy from waste side?

[Stephen J. Jones:]

Yeah. So the bar has just gotten higher, right, for some of the metals investment as commodity pricing has come down. We have re-run some of the investments just to kind of pressure test them and see what they look like, and they still look good. But obviously, I think we've got to be prudent when commodity prices are so low. So I want to make that clear. We will be looking at more investments in the environmental solutions space. We've announced five acquisitions now, including the one acquisition, the small one acquisition I announced today in, near the Niagara facility. There's other properties out there. We have a pipeline and a team who are looking at those investments. So that space right now and that's why I kind of – in my prepared remarks took a minute to say we really like the profiled waste space. It's growing organically at mid-teens growth on the revenue side, pricing is good. So we'll continue to kind of pivot towards the waste part of our business because we think it's pretty strong. And then, with respect to Energy-from-Waste facilities, since we're so big, if anything comes on the market we tend to get called about the energy, acquisitions. So we'll look at whatever comes along from that perspective. But we generally don't like to comment on those types of acquisitions. But we certainly will take a look at things that come on the market.

[Tyler Charles Frank:]

Great. Thank you. And then, are you – obviously the China divestment, are you – but you do I think maintain a very, very small ownership percentage there. Are you...

[Stephen J. Jones:]

That's correct.

[Tyler Charles Frank:]

Are you evaluating other opportunities in China? I know historically that's been like a large potential growth market but obviously have a little bit of hiccups when you went there before. So is there any plan to return there or into any other international markets?

[Stephen J. Jones:]

Yeah. So we're looking at certain international markets. We mentioned Australia, no update today on Australia. We're going through the due diligence process and that's moving along consistent with what we had expected. And in China, China is going to be a big market. Obviously, you got to be careful in China and we'll be careful there. But we're looking at opportunities there. It's almost hard to ignore because of the size of the growth that's going to occur in the China market.

[Tyler Charles Frank:]

Great. Thank you.

[Stephen J. Jones:]

Sure, Tyler.

[Operator:]

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

[Scott Justin Levine:]

Hey. Good morning, guys.

[Bradford J. Helgeson:]

Good morning, Scott.

[Stephen J. Jones:]

Hey, Scott.

[Scott Justin Levine:]

So I think firstly, Brad, you mentioned a $100 million positive working capital swing anticipated for 2016. I am guessing does that include – that includes the $30 million worth of reversal on – that effectively includes the benefit from the bonus accrual that you're foregoing for 2015 that's absorbed within the P&L. is that correct?

[Bradford J. Helgeson:]

That's correct. Yeah.

[Scott Justin Levine:]

Got it. And then how much of the remainder is Durham-York and are there any other major pieces included within that bucket?

[Bradford J. Helgeson:]

Yeah, at the risk of oversimplifying things, because there are other movements in the business, but the two significant – the $50 million that I mentioned is two items. It's the Durham-York project and the delay in us hitting the milestones required to release final payments under that contract and then the movement in the bonus accrual. So you add those two together and that's $50 million.

[Scott Justin Levine:]

Okay. So $50 million is other variables?

[Bradford J. Helgeson:]

No, sorry, so $50 million – just to be clear, so $50 million and it's always a little confusing I think when you're talking about year-over-year working capital changes. What we're seeing is a negative working capital impact on our free cash flow in absolute terms of $50 million this year, a positive one of $50 million next year, so the delta is $100 million.

[Scott Justin Levine:]

Got it. Okay. And then I know you don't plan to give guidance for 2016 until the next quarter, but can you comment regarding the expectations for growth CapEx. I know that's not a component of your free cash flow pure definition, but even if you could just talk in relative terms how might that compare to what you guys are spending this year?

[Bradford J. Helgeson:]

Yeah, well – it'll – first of all we don't forecast growth CapEx for speculative projects. In terms of what's committed we're going to finish up the work at the Essex County facility, but as I mentioned in the prepared remarks, that CapEx is now fully funded by the bond offering that we did. We're going to continue to work on Dublin, but again that's going to be financed. We will have relatively little if any spend required at this point for New York City until we get the go ahead on the Manhattan transfer station. We would expect to continue to make certain investments in the metals area, but as Steve described, if this is the market environment that we find ourselves in next year, that number is probably going to be lower than it's been in the past. We're almost certain it will be lower than it's been in the past, and then the variable is M&A. And based on the acquisitions we've been able to make in the environmental solutions space and their performance thus far, it'd be thrilled if we can invest in some more of those opportunities. So that was, I guess, an elaborate non answer. I am not sure.

[Scott Justin Levine:]

No, I can appreciate where you're and have you – just trying to get a sense of magnitude. Obviously, this has been a very big year for growth CapEx. So just trying to get a sense of how much that might come down for next year and why. So that's helpful. One last one, on the Environmental business and some of these recent acquisitions, I think there have been four acquisitions, if I counted correctly or maybe five?

[Stephen J. Jones:]

There is five acquisitions. I announced one acquisition today too Scott, just a smaller one acquisition, Niagara, so there is five acquisitions.

[Scott Justin Levine:]

Got it. Is there any way you can speak to the aggregate financial impact of those and maybe a little bit more elaboration on the synergies you see with that business? I know you talked about this a lot at the Investor Day, but just a reminder of some of the synergy with your existing business in the industrial side you see and it sounds like you guys are pretty optimistic regarding the prospects of that business. So I'll take any more color you can give.

[Bradford J. Helgeson:]

Yeah, we are. So the five acquisitions, represent about $80 million of revenue and that's incremental revenue for the services that they provide. Of course, we have the existing profiled waste business that we have for many years, in the Energy-from-Waste portfolio, which is of a similar size. If you add those two together and there is – as Steve, was commenting, the overall blended margin of that business – some of it is existing, and some of it is, the business that we just acquired is pretty consistent with our overall corporate EBITDA margin. One thing that we have said, and without getting into specifics on any particular deal or specifics necessarily on synergy categories et cetera, is that what we're seeing is our entry multiple into those deals is about seven times. A couple of these deals just given the nature of them have been higher than that in terms of historical results. But based on a number of the synergies that we are able to realize relatively, quickly, primarily from internalization of profiled waste volumes and then also over the longer term, enhance growth rates, as these businesses come under the Covanta umbrella. We look to get that multiple significantly south of that, in terms of looking at ultimately the amount of capital invested and then what that business will be generating a year, two years, three years out.

[Scott Justin Levine:]

Got it. And then, with regard to that $80 million in revenue Brad, that's an annualized number, I take it for the five deals.

[Bradford J. Helgeson:]

It is, yeah.

[Stephen J. Jones:]

Yeah

[Scott Justin Levine:]

Do you have a sense to how much of that would be a rollover benefit for next year?

[Bradford J. Helgeson:]

It's real high level, it's probably 50-50.

[Stephen J. Jones:]

Yeah I'd say 50-50.

[Scott Justin Levine:]

Got it. Okay, it's a $40 million next year then.

[Bradford J. Helgeson:]

Yeah.

[Scott Justin Levine:]

Got it, great. Thank you.

[Stephen J. Jones:]

When you look at the timing on when we did some of these deals, yeah that's about right.

[Scott Justin Levine:]

Got it. Thanks.

[Stephen J. Jones:]

Sure.

[Operator:]

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

[Barbara Noverini:]

Thank you. Good morning, everybody. In the Environmental Services...

[Stephen J. Jones:]

Good morning, Barbara.

[Barbara Noverini:]

Good morning. In the Environmental Services businesses what percentage of your customer base is exposed to either energy or commodity related end markets? Just trying to get a sense of how volatile demand in this business can be relative to your base business.

[Stephen J. Jones:]

That's an interesting question. I don't have a good feel for that. I don't think they are overly exposed. Some of them will be involved or were involved in some of the wastewater clean up on fracking, but that's a small percentage. I don't think there's much of a correlation there. They provide services for lots of different industries, so they're kind of broader based and you think about environmental cleanup and things like that. So it's kind of across the board. I don't think we're overly exposed there is my impression.

[Barbara Noverini:]

Okay. Thank you.

[Operator:]

And we have a follow-up from Tyler Brown of Raymond James. Please go ahead.

[P. Tyler Brown:]

Hey, thanks guys for the quick follow-up here.

[Bradford J. Helgeson:]

Hi, Tyler.

[P. Tyler Brown:]

Yeah. Hey, Steve, you noted that the spot waste pricing was flat. I was curious if you could give some more color there. Can you bifurcate spot pricing say in the northeast versus elsewhere?

[Stephen J. Jones:]

Yeah, I mean we can look at the spot pricing by the various markets, and it's a little confusing because when you get into some of our numbers, we've got contracted waste and then we've got kind of two forms of spot waste. We've got the profiled waste, which is a real high price as I mentioned, and then you've got kind of municipal solid spot waste, which the pricing – and that's the comment I made. I think the pricing has been kind of flat, but there seems like there has been some discipline around that recently.

[P. Tyler Brown:]

Okay. Yeah. I mean it feels like there's potential for that northeastern market to tighten up. I was just curious if you're seeing any specific trends there. But just real quickly, is there any update on the beneficial reuse of ash? Have you guys seen anything, anymore movement there?

[Stephen J. Jones:]

Yeah. So Pasco County in Florida has a permit now from the Environmental Regulators to use the ash in roadbed construction, and I believe they are moving forward on that. A lot of people are watching how that goes. There was a bunch of testing that went into get the environmental approval. So folks are particularly in Florida, the plants in Florida are watching how that goes and we'll probably want to follow suit. So Pasco is kind of leading the way there. We continue to look at that. We've hired a few people over the last couple of years to look more closely at that. In some respect that's been the Holy Grail of Energy-from-Waste industries, can you do something with that ash rather than having to pay for disposal. So we continue to work pretty hard on that. And again, Florida, it looks like there is some positive movement in the right direction.

[Bradford J. Helgeson:]

Yes, Tyler, I would actually, and they are unrelated, but I would put ash for use and market pricing in the northeast in sort of the same category in the same sense that we're seeing some things that would cause us to be optimistic. But that's something that's going to play out over the next several years. I think in the spot market – and I'm just jumping back for a second.

[P. Tyler Brown:]

Yeah.

[Bradford J. Helgeson:]

To your questions, your first question. Where I think, we'll really see an impact for Covanta is in the locations where we have New York – significant amounts of New York City waste coming in to displace spot waste to really tighten up some of those markets.

[P. Tyler Brown:]

Yeah.

[Bradford J. Helgeson:]

Specifically Philly and upstate New York.

[P. Tyler Brown:]

Okay. Yeah. That's very helpful. Thanks guys.

[Stephen J. Jones:]

Thanks, Tyler.

[Operator:]

And we have a follow-up from Michael Hoffman of Stifel. Please go ahead.

[Michael Hoffman:]

Thank you. Brad on page 21 or slide 21, you didn't mention what was in the $21 million positive other. And I have a suspicion there, something is in there that you actually control that are pretty useful to understand.

[Bradford J. Helgeson:]

I'm sorry, you're referring to?

[Michael Hoffman:]

Slide 21, it's the EBITDA waterfall and you...

[Stephen J. Jones:]

Slide 11.

[Michael Hoffman:]

Yeah.

[Bradford J. Helgeson:]

Slide 11.

[Michael Hoffman:]

Yeah.

[Stephen J. Jones:]

Oh, yeah.

[Bradford J. Helgeson:]

Yeah. So the – and I mentioned a few of these, but there are few impacts in there. That's where you see the reduction in bonus accrual things like stronger waste pricing from the profiled waste is in that category, the contribution year-over-year of New York City. Those are really – and the acquisitions of the Environmental Solutions businesses, and then it sort of by definition other is everything else but those are really the big positive drivers.

[Michael Hoffman:]

And if you thought about it, half – more than half is everything but the bonus accrual – the bonus accrual goes away, so all the others are things that are retained. I'm just trying to understand what's in that, that's retained?

[Bradford J. Helgeson:]

Yeah. Rough numbers, it's about 50-50.

[Stephen J. Jones:]

Yeah, that's about right.

[Bradford J. Helgeson:]

And half is everything else.

[Michael Hoffman:]

Okay. All right. That's good to know.

[Stephen J. Jones:]

Yup.

[Michael Hoffman:]

Great. Thanks.

[Stephen J. Jones:]

Thanks.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Steve Jones, CEO for any closing remarks.

[Stephen J. Jones:]

Great. Thank you. Thanks again everyone for joining our call today. We look forward to continuous dialog about Covanta with all of you. So thanks again and have a good day.

[Operator:]

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