Covanta Holding Corporation
Q4 2015 Earnings Call Transcript

Published: 17 Feb 2016

[Operator:]

Good morning, everyone, and welcome to the Covanta Holding Corporation's Fourth Quarter and Full Year 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 10079278. The webcast as well as the transcript will also be archived on www.covanta.com. Please note there will be an opportunity for questions and instructions will be given at that time. 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 fourth 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. These slides can be accessed now or after the call on the Investor Relations section of our website, www.covanta.com. These prepared remarks should be listened to in conjunction with these slides. Now, on to the Safe Harbor and other preliminary notes. The following discussion may contain forward-looking statements and our actual results may differ materially from those expectations. Information regarding factors that could cause such differences can be found in the company's reports and registration statements filed with the SEC. The content of this conference call contains time-sensitive information that is only accurate as of the date of this live broadcast, February 17, 2016. 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 the 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 now like to 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. I'll give a brief overview of our 2015 financial results and an update on our strategic initiatives, and some thoughts on 2016 also. Then, I'll get into details on the waste, energy and metals revenue lines and our operating expense. Before I do any of those things, I want to briefly discuss a few points on capital allocation. In December, we announced that we would be maintaining our current $1 per share annualized dividend rate. As we've discussed in the past, we see this level as not only sustainable, given the long-term contracting nature of our business, but we also believe that our dividend could grow over time as our growth investments and Continuous Improvement initiatives begin contributing to our results over the next few years. That said, for 2016, the board and management determined that, given the cash requirements for growth this year and the lower commodity markets, it would be prudent to maintain our current payout at this time; this was not meant to indicate any change in our long-term prospects or outlook in our core business. I'm also happy to report that we repurchased $50 million of stock since our last earnings call. Approximately $32 million of that was completed in the fourth quarter at an average price of $15.33 per share. The other $18 million was completed in January at similar pricing. Given the recent market volatility and the proceeds which we expect to receive from our China asset sale, we saw this as an opportunistic way to return this capital to our shareholders. Now, moving on to 2015 results; adjusted EBITDA was $428 million and free cash flow was $147 million. Brad will go through the factors that drove these results in more detail, but I'll quickly highlight a few things. While lower market prices negatively impacted our results, operationally we had a strong year. Waste, energy and metals volumes for our Energy-from-Waste business came in within our forecasted ranges. We also achieved another year of record profiled waste revenue, 24% growth rate in 2015, and are expecting to see that business grow again in 2016. Also we're now receiving waste from New York City at both our Niagara Falls and Delaware Valley facilities. In terms of other positive news, we announced in late January that our Dublin-York (sic) [Durham-York] (05

[Bradford J. Helgeson:]

Thanks, Steve. Good morning, everyone. I'll begin my review of our 2015 financial performance with revenue on slide 10. Revenue was $1.65 billion, down $37 million versus 2014. North America Energy-from-Waste revenue declined $47 million year-over-year on a same-store basis. Within that amount, waste and service revenue increased by $13 million, driven largely by higher prices from the continued growth of our profiled waste business. However, energy revenue declined by $25 million and recycled metal revenue declined by $35 million, both driven by lower year-over-year market prices. EfW contract transitions were a net negative $14 million year-over-year, which included an $8 million decline in debt service revenue and the mark-to-market impact of several large waste contract transitions that we discussed at this time last year. EfW transactions for net new business increased revenue by $7 million compared with last year, largely driven by the contribution from the Pinellas County facility operating contract in 2015. Outside of North America EfW operations, construction revenue declined by $37 million year-over-year as construction of the Durham-York project was completed, but work began on facility improvements at the Pinellas facility. All other operations were up $54 million, driven primarily by the New York City MTS contract that commenced in the first quarter and revenue from the newly acquired environmental services businesses partially offset by lower biomass revenue. Moving on to slide 11. Adjusted EBITDA was $428 million in 2015 compared to $474 million in 2014. The year-over-year decline was primarily driven by lower energy and recycled metal prices in the North American EfW business, which reduced adjusted EBITDA by $59 million on a same-store basis. Contract transitions, primarily related to waste and service fee contracts, reduced adjusted EBITDA by $23 million in 2015 as we have highlighted with our outlook at this time last year. The additional expense associated with the Durham-York construction and startup delays represented a $16 million impact year-over-year. Lower variable incentive compensation expense, which is tied to company financial performance, was lower by $36 million year-over-year offsetting some of the negative impacts that I just mentioned. Positive drivers of adjusted EBITDA year-over-year included growth in the Environmental Solutions business both from acquisitions and growth in profiled waste revenue into the EfW plants, contribution from the New York City MTS contract that began in the first quarter, and the benefits of our cost saving measures implemented in 2014. These factors were partially offset by lower contribution from our biomass facilities, higher hauling and transportation costs related to transfer station and metals operations, and planned overhead increases to support our strategic initiatives. All of these net within the other category for a benefit of $16 million. Turning to slide 12. Free cash flow was $147 million in 2015 compared to $240 million in the prior year. Focusing on free cash flow prior to changes in working capital, which can introduce some variability to reported free cash flow in any particular period, the year-over-year decline was $66 million from $235 million in 2014 to $169 million in 2015. This decline was driven by the same factors that impacted adjusted EBITDA, with lower commodity prices being the most significant as well as increased maintenance CapEx. As we have throughout the year, we've presented the maintenance CapEx delta under the previous accounting method for maintenance CapEx at publicly owned facilities, so that it's apple-to-apples with 2014 and with our calculation of adjusted EBITDA. Free cash flow was further impacted by a net cash outflow into working capital of $22 million in 2015. I'll note that this outflow ended up lower than we had expected as we received a payment from our Durham-York client late in 2015 that we had not anticipated, and we benefited from other corporate working capital timing related to both receivables and payables at the end of the year. This is why we came in near the midpoint of our guidance instead of the bottom end of the range as we had guided on the last earnings call. This was good news for 2015 free cash flow, but it will mean less of a working capital benefit than we were expecting for 2016. I'll discuss this again in a few slides. Now, we'll move on to our growth investment activity and outlook, please turn to slide 13. We invested $34 million in organic growth projects in 2015, primarily metal recovery systems and the regional metal processing facility that we discussed on our last earnings call, as well as small investments in new equipment in the Environmental Solutions business. Investments in the infrastructure to support the New York City MTS contract and in the emissions control system at the Essex County facility were $30 million and $26 million respectively. We completed four acquisitions in the Environmental Solutions space for a total of $72 million in 2015. And we invested $184 million in the Dublin facility construction last year. As Steve discussed, that project is progressing on schedule. In 2016, we're expecting to invest between $270 million and $295 million towards committed or currently identified growth projects. The majority of this is associated with the Dublin project and the Essex facility upgrade. As I pointed out on the last call, Dublin is being funded completely by project subsidiary financing, and Essex by proceeds of a tax exempt bond offering, so neither will require corporate cash to complete. We anticipate about another $10 million of facility investment to complete the work needed to serve the Queens MTS under the New York City contract and another $40 million of investments as we build out additional regional metals processing facilities, and invest in expanding our Environmental Solutions' service capabilities. As Steve mentioned, we've already closed one deal on the Environmental Solutions space earlier this year for $6 million and have another that we've signed for approximately $2 million, both of which are reflected in our 2016 outlook. Beyond that, we don't forecast potential future acquisitions. We'll continue to look for strategic bolt-on acquisitions in the Environmental Solutions area in 2016, but absent a particularly compelling opportunity, we don't anticipate investing as much as we did last year. Candidly, we're thrilled with the progress we've made up to this point with tuck-in acquisitions for this business, particularly given our targeted investment criteria, and we'll likely focus primarily on integration in 2016, internalizing waste, improving margins, and growing those businesses as part of the broader Covanta platform. Turning to slide 14. There are a few aspects of our capital structure that I think are important to highlight in this environment of elevated market volatility. First, we have no meaningful debt maturities until 2020. Over the past several years we've made a concerted effort as part of our balance sheet strategy to prioritize long-term, fixed rate, unsecured financing. This has come at the cost of higher interest expense, as compared to relying more heavily on shorter-term floating rate secured financing

[Operator:]

We will now begin the question-and-answer session. The first question comes from Al Kaschalk of Wedbush Securities. Please go ahead.

[Al Kaschalk:]

Good morning, guys.

[Stephen J. Jones:]

Good morning, Al.

[Bradford J. Helgeson:]

Good morning, Al.

[Al Kaschalk:]

Steve, I want to focus on mainly just the – on the operations side and you addressed some of these things and with the year under your belt, I maybe want to just get a little more discussion about the opportunity set and particularly on the efficiency side and the benefit to grow EBITDA. So, I mean, first, I guess, are you – you've been through all the plants, I know, and done some reviews and worked with the team on this, but are you seeing a greater opportunity set to grow EBITDA based on these efficiencies or are you more concerned in the near term that some of this CapEx or maintenance spend needs to be put in place for that to start to really generate in 2017?

[Stephen J. Jones:]

Yeah. So in 2016 the number that we have for this team is about – let's talk about Continuous Improvement, the number after we've done some of the assessments is about $10 million in benefits. Now, that's after you hire some folks and there's some upfront costs that you need to expense, so that's net of that, right? And I expect that we'll start to find even more projects. I mentioned the one project that we found – this is early on, we went to Haverhill and we've found the project and it's about a $300,000 benefit, this is around the ash monofill. I would tell you, in my previous life, finding a $300,000 project was like finding gold. Because after you're 10 years into these types of Continuous Improvement activities, it's hard to find such a big project. And we've consistently found larger projects than I'm used to finding, when I've done this in previous roles. So I've been pretty pleased with kind of the target-rich environment around Continuous Improvement. Now, if you talk about maintenance and you mentioned that Al; maintenance is lumpy, right? So – and year-in and year-out, you might have to do more maintenance or less maintenance. So 2014 was lower, kind of lower end of our range, 2015 right in the middle, 2016 a little higher in our range. And it'll get lumpy because of the types of work that you need to do. These plants are getting older, so we have to continue to maintain them. If you look at what we're doing at Fairfax for example; that's something we need to do as it transitions to a tip fee facility. What you need to do though and what we're focused on, how do you do this maintenance? Because you have to do it. How do you do it more efficiently? And that's a Lean – I talk about Lean Six Sigma, Lean which is a set of tools allows you to do maintenance more efficiently. So how can you get into a boiler; do the boiler work more quickly, so that you get the plant on stream faster. And Lean provides a set of tools around that. And that's one area we're really focused on. And we're right in the middle of our outage – our spring, call it, winter outage season right now. A lot of our facilities are going through outages and we're utilizing the Lean tools that we have in order to do these outages more efficiently. So my goal there around using Lean in outages is to be able to do the work, but to do it less expensively, more efficiently, and get the work done that we need to have get done.

[Al Kaschalk:]

Great. And just a follow-up if I may?

[Stephen J. Jones:]

Sure.

[Al Kaschalk:]

On the – maybe shifting gear a little bit. I appreciate the capital allocation commentary and in particularly where the capital investments are going in 2016. But from your commentary, it sounds like, on the acquisition front, the mode now is to, for lack of better word, integrate or to scale these acquisitions, which I think indirectly is just driving a higher return on the capital that was invested through these acquisitions, is that fair?

[Stephen J. Jones:]

Yeah. Yeah it is. If you look at – I mentioned, we do these deals at about seven times EBITDA. We're trying to drive those down. The more successful we are in the integration, the better these deals look. And so, we've done a lot of them. And as Brad said, we've been more than pleased with our ability to grow this business as quickly as we had. But every time – whenever you're doing something like this, you're rolling up businesses, I think there is a period of time where you got to step back and say, okay, what do we got here, how do we optimize it; and we're kind of in that phase right now. We've done six of these deals over the last 18 months or so. You're seeing a lot more focus on integration and how we drive those additional turns out of that multiple. And that will be primarily the focus in 2016.

[Al Kaschalk:]

Okay. Best of luck.

[Stephen J. Jones:]

Thanks, Al.

[Operator:]

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

[Patrick Tyler Brown:]

Hey. Good morning guys.

[Stephen J. Jones:]

Hey, Tyler.

[Bradford J. Helgeson:]

Good morning, Tyler.

[Patrick Tyler Brown:]

Hey, Brad. Thanks so much for the 2016 bridges in the deck, I think they're super-helpful. But can you kind of give a little more color on the free cash flow drivers? So I get it that core EBITDA is slightly down, you have maintenance CapEx that's slightly up, and it sounds like, I guess, cash taxes, cash interests are somewhat neutral. But given the bonus accruals in the Durham swings and I get that you've got a part of the Durham here in 2015, but it still feels like something is working against you in working capital. Is there anything else that we should be thinking about in 2016 as it regards to working capital?

[Bradford J. Helgeson:]

Yeah. From a working capital standpoint and we talked about this, I think, on the previous – on the last earnings call. We expected – I mean, there are lots of ups and downs in working capital in any particular period, but we really were looking at two significant drivers of positive working capital movement from a cash flow standpoint in 2016

[Patrick Tyler Brown:]

Okay. So your kind of, call it, corporate working capital was more positive in 2015 and you don't expect that to recur in 2016?

[Bradford J. Helgeson:]

That's correct.

[Patrick Tyler Brown:]

Okay, okay. That's very helpful. And then, Steve, just a bigger picture question. There's been lots of rumblings in the press about landfill closures in Oregon. It sounds like Vancouver, CA is – got a desire to find some disposal alternatives, maybe even opportunities in Alabama. But we've gone through this before, but do you feel that there are real or palpable opportunities in the North American fleet for expansion? And do you think that that might be something that you guys see come to a head, maybe this year, next year?

[Stephen J. Jones:]

Yeah. I do. I think you're seeing the market the way I'm seeing it. There's opportunities, whether you're talking Huntsville or Marion County. I was out at Marion County last week in – I think there's going to be opportunities for expansions at some of those facilities depending on what some of the other – some of the nearby municipalities and what those folks want to do with their waste. So I think there's been a time, a period of time here where we haven't had a lot to talk about in the U.S. and now there is two or three opportunities that, I think, are starting to come to a head.

[Patrick Tyler Brown:]

Okay. That's great. Thanks guys.

[Stephen J. Jones:]

Thanks, Tyler.

[Operator:]

The next question comes from Noah Kaye of Oppenheimer. Please go ahead.

[Noah Kaye:]

Thanks. And if we could just continue on the pipeline assessment here, I was just wondering if we could get your thoughts on the secular economy package in the EU, basically affirming support for waste energy as part of the mix? And thinking about some of the countries, particularly in Eastern Europe, that have very high landfill rates, just wondering how is that – or is that starting to translate to increased inquiries. And I know you're planning kind of a different strategy at going after those opportunities, say, in North America. But can you talk about the impact that all that is having on the European pipeline? Thank you.

[Stephen J. Jones:]

Yeah, sure. The European pipeline, so – is interesting because you've got kind of Western Europe, which is – when you look at Germany, not a lot of landfill activity at all; they've already made the move to Energy-from-Waste. Some other places like Dublin, which is where we're making a large investment has started to move again more towards Energy-from-Waste. If you look at Eastern Europe, also a number of opportunities there, I think, Poland. And there's a number of inbound inquiries at this point that we're getting to either partner with folks or do business development. Now, we got to be careful, because in the past, we've spent a lot of money on business development and have come up a little short. But we do also have the Dublin facility that we're building. So that gives us a bit of a beachhead in order to look more closely at the European opportunities. And then, you take the UK for example. UK has a number of facilities, a lot of those that were built. We were able to participate in that part of the market early on, but some of those facilities are now coming back on the market as potential sales of Energy-from-Waste facilities. And so we'll look at those as well as you were talking about the secular economy. Anything that drives the ability to reduce or use recycle is good from our perspective. And then, you do have what's leftover, which is – and I think it's going to be hard to get to a zero waste economy, but to the extent that you still have waste that's leftover, recovering the calorific value of that waste is particularly important. You don't want to just put that in a landfill and not collect – not recover that value. So the ability of the entire EU to move in that direction, I think, will be positive from our perspective. And being the largest Energy-from-Waste company, we have the opportunity to play in some of these spaces. So I think it's going to be positive going forward. So we applaud any move in that direction. With the U.S., we'd do more of this. And as Tyler asked in the previous question, first time now we're seeing in the U.S. some chances to do some more development of Energy-from-Waste in the U.S. So I'm hopeful that the U.S. will also move in the direction that the EU has moved.

[Noah Kaye:]

And then, as a follow-up, thinking about those opportunities and kind of the technology, I know you spent a lot of time with gasification and given the company has its proprietary technology, what's the mix of, let's say, traditional combustion versus gasification inquiries you're getting? And how are you thinking about your positioning there?

[Stephen J. Jones:]

Yeah. It's interesting. We have our own technology CLEERGAS in the gasification area. We'd like to put that to – into commercial operation now. So we're looking for opportunities to commercialize that, as we speak. We have a facility running in Tulsa. It's running quite well. In fact, I was there last week also. That facility is running quite well. We'd like to build even more facilities and kind of increase the size. It's interesting, if you look at mass-burn versus gasification, you can get pretty much the same emissions output from either type of technology depending on what type of backend on the plant, so what kind of cleanup system, pollution control cleanup system you put on there. I will say on gasification, I think the jury is still out. Some of the larger players are still – who moved into gasification more quickly are still trying to prove out the technologies that they've used. I'll mention Plasco for example, they unfortunately went bankrupt. So we're kind of keeping an eye in both camps or foot in both camps. I think gasification will come to bear at some point. But right now I think whether those projects make sense economically – I would tell you that they're difficult from an economic standpoint from my experience. But over time, I think, I think the technology will – I think both technologies will have a place in the market, is my current thinking.

[Noah Kaye:]

Thank you very much for the color.

[Stephen J. Jones:]

Yeah, sure. Thanks, Noah.

[Operator:]

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

[Scott Justin Levine:]

Hey, good morning guys.

[Stephen J. Jones:]

Hey, Scott.

[Bradford J. Helgeson:]

Good morning, Scott.

[Scott Justin Levine:]

I want to focus on the metals business a little bit. I know you discussed Fairless Hills and you cited the potential for additional investments in this area. I mean, is there a way to get a little bit more granular with regard to the economic impact and how that affects your business and the investment in that plant and the likelihood that we see others? And then, as a follow-on to that, I know in the past, you've gotten away from this a little bit, but you used to provide some earnings sensitivity, rules of thumb, with regard to changes in pricing and change in your earnings. Non-ferrous has come up a bit in terms of the mix. But help us better understand, I guess, what the earnings sensitivity might be if indeed we do see some improvement in metals off the recent stability we've seen here.

[Stephen J. Jones:]

Sure, Scott. This is Steve. I'll take the first part, Brad will answer the second part. With respect to the Fairless Hills facility, that's going extremely well. I'm a bit of a pain here inside of Covanta, because I'm constantly asking them to re-run that investment to see if it makes sense at the current rate – current HMS #1 Index. At the current HMS #1 Index, we just re-ran it, that's about a 20% plus return. So you'd make those kind of investments all day long. The other thing I've been saying too, internally, is we can't control the index, right? We're a price taker, if you will. But what we can control is the amount of metal that we recover and also the quality, and Fairless has allowed us to improve the quality significantly. And you may have heard me say this before, what used to happen – I mean, it's happened in some of our facilities still and that's why we're looking at additional processing capabilities, and I'll talk about that in a second. But what happens is, the metal goes through the Energy-from-Waste process, it comes out, it's got a lot of residue and ash on it, and we have to sell it to a middle person, who then cleans it up, which is what we're doing at Fairless and get a higher price for it. And by taking out that step, or controlling that processing or cleanup step, we're able to extract more value from that metal. We will – because that are returns even at these lower prices – and we don't look at a capital investment, we kind of look at the kind of average to the cycle, but even at these lower end of the cycle, which, I think, we're in, these returns are good on Fairless. And right now, we're looking at two or three other regional processing facilities. So whether we do something in kind of the middle of the U.S., I'm thinking on the Eastern Seaboard, but do we see something down South, do we see something kind of in the Virginia area where we have some other facilities? I mean, those are types of things we're looking at now. And we'll be pretty creative on leasing equipment, things like that, so we don't tie up too much of our precious capital. Brad, why don't you...

[Bradford J. Helgeson:]

Yeah. Scott, regarding the rules of thumb, we – I mean, as you've noticed we've intentionally gotten away from providing an easy rule of thumb for translating HMS changes to what it means for our bottom line, really, because the problem with rules of thumb, they're elegant when they work, but they only work until they don't. So – and that's become particularly an issue as the price has declined. And I think, as you see in other commodities, as the price declines significantly as it has, you have changes in the ability of certain players in the market to economically participate. So what does that mean? As the price – and this varies by market, but generally, as we've seen, as the price of HMS starts to get below about $200 a ton, maybe a little higher than that, you're starting to really bump up against the fixed cost of many of the metals processes that historically we've been dealing with. So a lot of those guys have been candidly falling out of the market. And for the facilities that we have concentrated in the mid-Atlantic region, Pennsylvania, New Jersey, Long Island, we're now doing that work, of course, ourselves at Fairless Hills, and as Steve has been talking about, looking to bring on that capability elsewhere. So long story short, when prices were in the $300s, it was relatively straightforward. We would earn X percent of HMS plus or minus 50% and the relationship was pretty linear. As the market price falls, the market shifts a little bit, and so the rule of thumb becomes less meaningful, I would tell you that at these low prices, the marginal impact of a change in HMS is much more meaningful to us than it would have been at much higher prices. So if the rule of thumb was 50%, I can't give you a precise number that would be accurate for the overall portfolio, particularly in a dynamic market as we're working through right now, but I could tell you that that percent would be higher today than it would have been in the past.

[Scott Justin Levine:]

Understood. But as you point out in your slides as well, you're assuming an HMS that's below where the current price is today in your guidance for 2016, that is. The follow-up question I guess I have – so with regard to the repurchase activity in the quarter, it sounded like that was really a one-off usage of the China proceeds; just looking to confirm that the buyback is effectively off the table this year given the current environment. If you can remind us how much is outstanding on the current buyback. And just looking for maybe a little bit more between the lines insight with regard to capital allocation plans for this year.

[Bradford J. Helgeson:]

Sure. And maybe before I answer the buyback question, let me just finish off the metals point, just to make sure we're clear. So the range of HMS that's embedded in our guidance of $125 per ton to $150 per ton, that corresponds to the range of revenue that we've also provided. So we're not just giving you the range of the price and saying figure out the sensitivity where, it all is connected. And so we've basically done the math for you in terms of how it would translate into revenue. Just want to make that clear.

[Scott Justin Levine:]

Got it.

[Bradford J. Helgeson:]

On the repurchases; yeah, I mean, the math – when you look at our expectation for free cash flow this year, the level of our dividend payout and our growth investments, the math is pretty simple, there isn't much, if anything, left for share repurchases. So I would tell you that we don't necessarily have a specific plan that we're prepared to talk about to buy back stock today during 2016. That doesn't mean it's off the table. I think as we hopefully demonstrated with our activity over the last couple of months, we can be nimble and opportunistic around what we think is the best re-allocation of capital to the extent that we have capital available to allocate. So that was an example of – I think that exactly describes what we did with our expectation around the China proceeds. So that's, I guess, probably the best way I would try and calibrate expectations for our potential activity this year. Regarding the authorization, following the $50 million of purchases we have $66 million remaining under our current level of board authorization for buybacks.

[Scott Justin Levine:]

Got it. Thank you.

[Operator:]

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

[Daniel Mannes:]

Thanks. Good morning, everyone.

[Stephen J. Jones:]

Good morning, Dan.

[Bradford J. Helgeson:]

Good morning, Dan.

[Daniel Mannes:]

A follow-up question on plant operating expense and maintenance CapEx; Steve, you mentioned in your prepared comments obviously there is some lumpiness to this.

[Stephen J. Jones:]

Yeah.

[Daniel Mannes:]

But the plants are also a little bit older. I don't want to make too fine a point on it, but as you look past 2016, you are a little bit elevated this year. Is it fair to assume that just given the age of the plants that the 2016 numbers is representative of future years? Or do you think that because of the discrete projects you're working on in 2016 that the longer-term outlook would be for maybe a normalization?

[Stephen J. Jones:]

The range that we gave, I think, is a good range. As you get beyond 2016, I suspect that you'll see – as the plants get older you got to do more maintenance, but I think that will be offset by the efficiencies around using Lean tools to optimize those maintenance activities. So I think there's going to be a kind of a give and a take there. So I think the range that we're giving you is kind of a 2016 and beyond range.

[Daniel Mannes:]

Got it. Okay. So you're now at a steady state.

[Stephen J. Jones:]

Yeah, yeah. Exactly.

[Daniel Mannes:]

The follow-up also on the metals and the CapEx there. You mentioned obviously this as a bit of a defensive move, because you're making sure you have an outlet, so you can get a decent price for your product.

[Stephen J. Jones:]

Right.

[Daniel Mannes:]

Should we see a recovery in metals prices? Are you disadvantaged then on your own processing? Are you then effectively competing with people you used to partner with? Or is that a non-event, because you've now created better channels to the market?

[Stephen J. Jones:]

We've created better channels. So right at this point, right now, they stopped by to see me yesterday, we're at a point where we're looking to sell metals to Turkey – in Turkey at this point. So we've now got different channels to market that we never had before, because at some of our facilities, we didn't even have kind of a lay down area to process the metal. It would literally go into a truck and we have to pull it out that day. And so now we can take it to a processing facility, clean it up, and then we can store it for periods of time, gives us more – and I'll use the word optionality -but it gives us more options basically on when we want to sell it, who we want to sell it to, whether it's inside the U.S. or outside the U.S. So I think ultimately this will be a big benefit even as the market recovers.

[Daniel Mannes:]

And just one last one on the same topic, given maybe some of the distress among your previous clients, does it makes more sense to buy than build, just because that the facilities would already be there and have already been processing your metal?

[Stephen J. Jones:]

Oh, yeah. We'll definitely look at that. So when we – so Fairless we built right and it was a good opportunity, because we're on the old – I think it's an old U.S. steel site, but it's an old steel site. So perfect, kind of perfect infrastructure there to put in the equipment. But there – as we look at some of these other regional processing facilities, we'll look to see what's already there and see how we can do it cheaper than just building it all out brand new ourselves.

[Daniel Mannes:]

Got it. That's helpful. Thank you.

[Stephen J. Jones:]

Sure, Dan.

[Operator:]

And we have a question from Andrew Buscaglia of Credit Suisse. Please go ahead. Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC (Broker) Hey, guys. Thanks for taking my question.

[Stephen J. Jones:]

Good morning, Andrew. Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC (Broker) Good morning. So you touched a little bit on the metals side of things when it pertains to your thoughts going forward with HMS Index. It sounds like you have a little bit more – you're a little bit more comfortable with risk on that side at this point. What about on the energy side? When you're looking at the guidance and when we look at the guidance, how much risk is embedded in there? And how do you think about that side of your business when it comes to your forecast?

[Bradford J. Helgeson:]

Yeah. Andrew it's Brad. The nature of the electricity markets where we sell allows us to take a more analytical approach, for lack of a better description, to our guidance ranges. So basically, the ranges that we give and that's embedded in our guidance are built around current forward prices. So that's very clearly observable in our markets. And then the tails on that range represents, based on our earnings at risk model, outcomes to the 95% and 5% confidence tails. So we have in other words 95% confidence just statistically based on observed volatilities that will be within the range of electricity prices that's embedded in our guidance. I wish I could say the same thing about metals, but it's a lot more arts and science at this point in the recycled scrap market. Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC (Broker) Okay. All right. That's helpful.

[Stephen J. Jones:]

Andrew, let me – this is Steve. One thing I wanted to point out to, there was kind of a opaque reference in my prepared remarks. But in the energy side, we're also looking at a number of things in order to get more from the energy that we produce. For years, we could just produce the energy and we sold under the power purchase – long-term PPAs. And one of the things we're looking at now is, this is a base load renewable power source, are there other markets or companies who want to buy a green power on a base load basis. And so, are there ways for us to get more out of the electrons that we produce. And then, in addition, we have facilities that are in high – in nodes that have high pricing at certain periods of time. So is there a way to do things like peakers in order to take advantage of the infrastructure and where our facilities are located. And so we've been looking pretty closely at how we can get more out of those assets, out of the energy assets. Again, we talk a lot about metals, but we're approaching some decision period, some decision steps around the energy side also, which we're hoping will drive more shareholder value from the energy side of our equipment. Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC (Broker) Okay. All right. Thanks for the color there. Just switching gears, looking at that plant OpEx. Can you just talk about – you talked about the Onondaga expense and Fairfax a little bit. Of those two, can you just split out the bigger expense? Are they pretty much similar?

[Stephen J. Jones:]

Fairfax is bigger than Onondaga. Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC (Broker) Okay. And then, exactly, when it pertains to Fairfax or Onondaga – or more so the Fairfax, is it really just a baghouse rebuild or is there anything else that you foresee in terms of larger expense going forward?

[Stephen J. Jones:]

Not really going forward. I mean, the opportunity has presented itself, because – primarily because it's going to be a tip fee facility. So if you think about where we get the highest adjusted EBITDA out of our fleet of 45 or so plants, it's from these merchant facilities or tip fee facilities, we tend to use the terms interchangeably. Fairfax is going into that class now. And so we saw this as an opportunity to make additional investments in the Fairfax facility in order to get it into kind of best-in-class service. I mean, it's been running reasonably well, but we thought this is a good time, particularly it's now going to – it's a large facility. It's one of our largest facilities and an important market. And so the ability to kind of get this – invest in this facility like we invested in a lot of our merchant facilities in order to make sure its positioned for success in the future, and this was a good time to do it. So there's some baghouse works – we're doing baghouse work, we're doing work in other areas of plant to get it kind of spiffed up in a good spot for its tip fee life. Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC (Broker) All right. Thanks guys.

[Stephen J. Jones:]

Sure.

[Operator:]

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

[Michael Hoffman:]

Hey, Steve and Brad, thanks for taking my questions.

[Stephen J. Jones:]

Hey, Michael.

[Bradford J. Helgeson:]

Good morning.

[Michael Hoffman:]

Good morning. I just want to ask this again, make sure I heard it correctly as well. I'm hearing a generally constructive view about commodities, hey, they're down, they've looked like they found a level and we can – at these – at this point the worse is behind us.

[Stephen J. Jones:]

Well, I don't want to get into the business of projecting commodity prices for everybody on the phone here, I've said that I thought we were kind of at the lower end of the cycle. Obviously, in our guidance we've got our view of the world. I'm sure you folks all have a lot of resources at your disposal that maybe have a different view of the world. So it's hard – particularly on the metals side, it's hard to – it's always hard to tell where things are going. I think you saw the numbers for HMS #1 as I mentioned in the high $150s. That tends to be – the first quarter tends to be seasonably high. So for the year, we're at between $125 and $150. People could have different views of that; that was kind of our view of where we saw metals at this point. So again, it's hard for us to predict exactly; as Brad was saying, the metals side tends to be more art and science. So it's a little more difficult in that area.

[Michael Hoffman:]

Okay. Thank you. Maintenance timing, and then view of margins. Should we be thinking about this as heavy maintenance first half, so lower margins in the first half, this is EBITDA margins?

[Stephen J. Jones:]

Yeah.

[Michael Hoffman:]

And then, later in the second half that's the pattern. And can we think about margins being flat overall for year-over-year? I mean, you finished the year at about 26%. Can you do 26%? Or worded differently, can you have your rest of the margin compression?

[Stephen J. Jones:]

Yeah. So on the first part of it, yeah, that we're in – heavy outage season is this time of year. So you'll see the first half – the first half of the year is where we do a lot of the outages, and we're in that right now. So I get a morning report and there is a number of our facilities in outages right now. The outages are going well, which I'm glad to say. And so your progression of margins is correct, in what you've laid out there. With respect to 2016 versus 2015, yeah, it'll be similar. I mean, until commodity pricing comes back will be – I think we'll be fairly stable on margins. As Brad pointed out, we've got roughly 85%. I mean, we're mostly a waste company, and that's – let me kind of point that out, two-thirds of our revenues are on the waste side. The waste side has been pretty stable, 85% of our required waste is contracted up. So we should be in a good shape there, that's why the margins will stay pretty stable. As commodity start to do better, I think you'll see margin expansion occur.

[Michael Hoffman:]

Okay. And then if I could one last one, on the plant operating expense, is that where I'm looking for, the potential $10 million from the Lean Six Sigma is in the EfW part of plant operating is to reverse that trend of it went up in 2015.

[Stephen J. Jones:]

Yes.

[Michael Hoffman:]

It should come back in 2016?

[Stephen J. Jones:]

Yes. Yeah. So at least early on I wanted to focus Continuous Improvement initiatives in the plant side of the shop. That will advance. Because if you look at Lean and Six Sigma, Six Sigma is more of a plant set of tools, but Lean is even doing value stream mapping. We're going to ultimately apply that across the company in some of the processes. I would tell you, I think some of our kind of corporate processes could use – use some value stream mapping and some cleanup, some waste in order to tax things like that and we'll get into that probably later in the year, but at least earlier in the year I really wanted to focus on the plant side. So I think your statement is correct.

[Michael Hoffman:]

Okay. Thank you.

[Stephen J. Jones:]

Sure, Michael.

[Operator:]

The next question comes from Andrew Weisel of Macquarie Capital. Please go ahead. James Ward - Macquarie Capital (USA), Inc. Hi. It's actually James Ward here for Andrew.

[Stephen J. Jones:]

Hi, James. James Ward - Macquarie Capital (USA), Inc. Hi. Steve. You've spoken quite a bit about a lot of interesting cost savings initiatives. It seems like you've been having quite a bit of success with them as well so far. I was wondering if you could just elaborate a bit further on the ones that – you've hit on the ones that have quicker, even immediate savings with minimal upfront costs, other ones that would require upfront investments, maybe something like buying software, equipment for some or all of your plants?

[Stephen J. Jones:]

Yeah, that's a good question James. When you start to look at stable ops, one of the stable operations, one of the things you really need to do is to make sure you have the right control systems on plants. And so we're looking at that right now on – we've good control systems, but are we collecting the data the right way, so that we can compare best practices across the fleet of plants. I mean, ultimately where you want to go is, within a plant you want it to run, like I said, like you had the best operators on the board every minute of the day, but then you start to going to compare those plants against its kind of – related plants. And so we have 45 plants, and then you start to move the best practices from one plant to each of the other 45 plants. And one of the things you need around that is, you need control systems and data collection in order to make that successful. I'd say we're pretty good at that right now, but if you talk to Mike de Castro who runs the supply chain, he'd say we can do better in that area and that'll be an area we'll look to make some investments as we start to even get further in the Continuous Improvement initiatives. James Ward - Macquarie Capital (USA), Inc. Great. Thank you very much.

[Stephen J. Jones:]

Sure.

[Operator:]

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

[Stephen J. Jones:]

Again, thanks folks for joining us today. It was a pleasure to talk about the fourth quarter and the year-end and we look forward to a prosperous 2016 and working with all of you. So thanks so much for your time today.

[Operator:]

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