Covanta Holding Corporation

Alan Katz - Vice President-Investor Relations Stephen J. Jones - President and Chief Executive Officer Bradford J.

Helgeson - Chief Financial Officer & Executive Vice President

Ben J. Kallo - Robert W.

Baird & Co., Inc. (Broker) Patrick Tyler Brown - Raymond James & Associates, Inc.

Al Kaschalk - Wedbush Securities, Inc. Daniel Mannes - Avondale Partners LLC Michael E.

Hoffman - Stifel, Nicolaus & Co., Inc. Scott J.

Levine - Imperial Capital LLC JinMing Liu - Ardour Capital Investments LLC Barbara Noverini - Morningstar Research

Thank you and good morning. Welcome to Covanta's second quarter 2015 conference call.

Before I begin introductions, I would like to remind everyone that we are holding an Analyst Day in New York on August 12. At this event, various members of our management team, as well as clients will provide a detailed discussion on the company and our markets.

If anyone would like to attend this event, please contact us at [email protected] for the details. Moving on, 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, July 23, 2015.

We do not assume any obligation to update our forward-looking information unless required by law. Any redistribution, retransmission, or rebroadcast of this call in any form, without the express written consent of Covanta, is prohibited.

The information presented includes non-GAAP financial measures. Because these measures are not calculated in accordance with U.S.

GAAP, they should not be considered in isolation from our financial statements, which have been prepared in accordance with GAAP. For 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 now like to turn the call over to our President and CEO, Steve Jones. Steve?

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. Q2 adjusted EBITDA was $83 million and free cash flow was a negative $40 million.

Similar to Q1, our second quarter results were driven largely by the impact of lower pricing in the energy and metals market and the impact of contract transitions on the waste revenue line. This quarter we also had the impact of increased maintenance spend, both expense and CapEx, to simply to a shift in outage activity from Q1 into Q2 this year.

To be clear, overall maintenance spending looks to be coming in at the lower end of the range for the year. We're very pleased with this trend.

Overall, we had another strong quarter operationally. Client availability, energy production, and metals recovery were on target and we had another record quarter of special waste revenues.

We continue to benefit from the previously announced efficiency and cost savings initiatives, in particular, the outage efficiency program has gained traction. This is a key factor on why we're seeing good results on our maintenance spend for the year.

We also continue to make great progress on several of our key strategic initiatives this quarter. First, in late May, we acquired Advanced Waste Services, which expands our presence in the environmental services sector.

This is the second acquisition that we've made in this space. The AWS assets are located in attractive markets in the Midwest and have operations that overlap strategically with our facilities in Indiana, New York and Pennsylvania.

These assets will allow us to continue to drive special waste volumes into our EfW facilities, but they also expand our capabilities in processing and recycling different waste streams and allow us to offer our clients new complementary environmental solutions and services. These businesses are logical and highly synergetic extension of our existing special waste business and offer an attractive opportunity for us to leverage our unique asset base for growth.

We look forward to discussing the strategy in this area in more detail at our upcoming Analyst Day. Second, earlier this month, we announced that we've finalized an agreement to exchange our existing China assets for an equity stake in Sanfeng Environment; one of the largest Energy-from-Waste players in that market, and a subsequent sale of 90% of that stake for approximately a $110 million in cash.

This transaction allows us to monetize our assets in an attractive valuation and keep a small equity stake in a much larger Chinese player with whom we plan to maintain an ongoing relationship. Note that we continue to be interested in the China market, where Energy-from-Waste development will far exceed the rest of the world combined over the next several years.

At the same time, as I've mentioned to many of you, it's a complex market, and we'll continue to take a highly disciplined approach, as we seek the right opportunities for investment there. Now, I will address what led us to lower our guidance for 2015, despite an otherwise strong operating year-to-date.

Brad will take you through the financial impacts in detail in a few minutes; I'll address the business drivers and status. We continue to face challenges in the commissioning and final start-up of commercial operations at the Durham-York facility.

Let me give you some background to explain how we got here and talk about our plan for getting this right. As I mentioned on the last call, we've been combusting waste at the facility since February and producing power intermittently.

However, we've encountered certain operational challenges that so far have prevented us from bringing the plant up to the optimal performance levels that we expect to achieve during full commercial operations. This facility was constructed with highly advanced design features for both energy efficiency and air pollution control.

As we move towards full-scale operations, we've had to make certain adjustments related to these systems. These adjustments are relatively minor issues in the scheme of things, but they've taken some additional time here, given the complexity of the systems involved.

The key is that we believe we've identified all the issues and have a clear plan to address them. We will take the plant down and conduct a maintenance outage in the near term, where we will make the necessary modifications.

This should put us on track to commence commercial operations in Q1 2016, but, of course, we're going to be working very hard to do even better than that. I'm confident that our team will bring this project across the finish line.

The issues that we're currently working through are not necessarily unique for a facility like this. The testing and commissioning process that we're now in is intended to identify and work out these types of things to ensure that the facility runs optimally, as it commences its operating life.

Think of it as the shakeout period for the facility. However, unfortunately, in this case, previous delays in the completion of construction have put us in a position where we no longer have any margin for error in the timeline.

We're currently involved in litigation with some of our contractors. So it would be inappropriate for me to rewind the tape and get into a lot of detail on the issues related to construction executions.

So let me be clear. I'm extremely disappointed that we ended up where we are, and we will devote the resources necessary to begin full-scale operations as soon as possible.

The impact of this delay on the overall company financial results this year comes from several things: increased costs incurred, lost operating revenue, and delayed penalties owed to our client. In addition, the timeline has now pushed the receipt of several construction milestone payments into 2016, which will further impact free cash flow in this calendar year via working capital.

As you know, our expected timeline has continued to slide over the past several quarters. So the financial impact has continued to grow, but until now, this was all well within our original guidance for the year.

However, this latest delay has put us in a position, where our guidance revision is appropriate. In addition to the Durham-York impact, we experienced further weakness in recycled metal prices since the beginning of the year.

As discussed when we originally issued guidance in February, we assumed a range of potential commodity prices; we're still within that range, but towards the lower end. So that has also contributed to our revised guidance levels.

Non-ferrous prices, in particular, have trended down very quickly. And while the impact of Q2 was minimal, if markets stay at current levels for the rest of the year, we'll see some additional pressure to our metals' revenue line.

Let's now get into 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 its volumes at the Queens MTS and we are on track to achieve a full-year run rate in the fall. As I mentioned, we also completed the AWS acquisition to continue to drive growth in our special waste business, and expand our capabilities and service offerings to our industrial client base.

This is a great strategic acquisition with immediate synergies and exciting opportunities for combined growth. In terms of price and volume for the quarter, Q2 was right in line with our expectations.

As expected, waste volumes were slightly lower, compared to Q2 2014, as a result of the increased scheduled maintenance activity. Pricing was up slightly with escalation and special waste growth offsetting impact from contract transitions.

This was also our fifth quarter in a row of record special waste revenue, which is pretty exciting. Special waste growth continues to drive the overall average price on un-contracted volumes meaningfully higher.

We see a long run rate for growth in this area, both at our EfW facilities and with the new opportunities that we're pursuing with our broader expansion into providing environmental services. Now, let's move on to energy.

Please turn to slide five. Q2 North American EfW energy revenue was down 9%, versus the same quarter last year, as a result of lower market pricing slightly offset by increased volume.

This was partially offset by the increase in energy revenue share from contract transitions and the Pinellas contract. As you can see, we've lowered our expectations for market energy prices based on the current forward curves, particularly, in PJM and New England.

If prices play out this way, we'll see an impact of a few million dollars to our full-year numbers. Now, let's spend a few minutes on the metals business.

I'm now on slide six. Market pricing continues to have significant impact on metals revenue year-over-year.

The average price for the HMS #1 Index was $236 per ton in Q2. That's $132 decline compared with the same quarter last year.

Total same-store metal pricing was down 42% year-over-year. In terms of Q2 volumes, ferrous and non-ferrous volume each increased 5% year-over-year on a same-store basis, driven by our continued improvement in recovery and in line with our expectations.

Our initial full-year guidance contemplated a potential range of HMS prices from $200 to $300 per ton. We're starting to see some stability in ferrous pricing with July pricing coming in at $247 per ton.

However, given prices year-to-date, we've brought down our expected range for the full-year HMS price to $200 to $250 per ton. As we discussed in the past, we continue to focus on cleaning the metal in order to make our product more attractive in the market and to improve the percentage of the index that we receive.

This will help to offset some of the pressure on market pricing. In the non-ferrous metal market, specifically, recycled aluminum, forward prices declined significantly in Q2.

We've adjusted our outlook for our full-year non-ferrous price to reflect this and now expect to be at approximately $775 per ton. All-in, metal pricing is now expected to be about a $10 million negative impact for us compared with where we started the year.

Despite lower market metal prices, metals recovery is an area where I continue to see further opportunity for growth. We're exploring a number of different ways to grow this business.

We're planning on discussing this as well as ways for us to potentially increase our pricing during the Analyst Day next month. Now, let's move on to operating expense and CapEx.

Please turn to slide seven. We've now completed our heavy maintenance season with a particularly busy outage schedule in Q2.

Certain of the efficiency and cost-saving programs that we implemented over the past year are flowing through the maintenance line and paying dividends. Total EfW maintenance spend in the quarter, including both expense in CapEx, increased by 32% versus Q2 2014, but this increase was mostly driven by outage timing, and, in fact, we're trending towards the bottom-end of the range on our full-year outlook.

Remember, the increase in Q2 spend was very much expected for a couple of reasons. First, we moved several planned outages into Q2 this year to capture higher energy prices during the winter months.

Second, we've added the Pinellas facility to our portfolio; this is a large complicated plant, which means more maintenance spending. North American EfW other plant operating expenses were up 1% on a same-store basis this quarter, compared to Q2 2014.

Again, you're seeing the benefit of the cost-savings initiatives. As I mentioned last quarter, I see significant opportunities for implementing continuous improvement practices to drive efficiencies across all of our operations.

We've started doing initial exploratory work on this, but it's still early days, and we're not yet in the position to put forward specific numbers on what this could mean for the company. That said, I'm very pleased so far with the team's enthusiasm in embracing these new methodologies to achieve greater results.

Let's move to slide eight to discuss our business outlook for both this year and the long term. As I've discussed, but I'll repeat again, our core business is running extremely well, and we're hitting all of our targets from an operating perspective.

I'd expect to be able to tell you the same thing as we move through the rest of the year. We're on track for a record metal recovery in special waste revenue.

The efficiency initiatives are bearing fruit on the cost lines, and the New York MTS operations continue to gain steam. With this backdrop, it's especially frustrating for me to have the two negative factors that I discussed earlier, the Durham-York delay and commodity prices impacting our expected results for 2015.

Our focus, though, is in getting Durham-York start-up behind us and moving to commercial operations as quickly as possible. We're looking forward to convincing the 20-year operating phase of the contract, running this world-class facility, providing excellent service for our clients as we always do.

As you know, we don't do these deals for the construction work; we do them for the long-term operating contract. Usually, we make a small profit on the construction work, but, unfortunately, in this case, we're going to lose some money.

That said, this project will be a consistent contributor for years to come based on our operating contract. Regarding the impact of commodity price fluctuations, the majority of our revenue is under long-term contract, and we seek to mitigate our exposure to near- and medium-term price volatility.

But we believe that the value that we extract from waste in the form of energy and metals offers far more upside over the long term than down side. In terms of our long-term growth opportunities, I've touched on some of these already.

The only other update I'll provide today is that the Dublin project construction is on schedule, both from a timeline and budget standpoint. And we're making tremendous progress there.

We'll share a real-time update with pictures and video at the Analyst Day. A logical question you have is whether the Dublin project is at risk for issues, similar to those we've experienced recently at Durham-York.

While these very large and complex infrastructure projects are never without risk, we feel very confident in the execution of the Dublin project. Early milestones are critical as they can have a rippling effect on the schedule down the line.

But as I have said, we're right on track and this project was structured with a very different risk profile, specifically, in terms of our subcontractor arrangements. Most importantly, we have a truly world-class team supporting us on-site, including Hitachi Zosen, a firm that has built more Energy-from-Waste facilities than anyone else in the industry.

Before I conclude, let me emphasize one thing. I view the Durham-York start-up as a one-time event, which in no way impacts the core business or our results long term.

Note that some of the cash flow impact this year will absolutely reverse and benefit next year. And for many reasons, most of which you are well aware of, we would expect 2016 results to be meaningfully higher than 2015.

With that, I'll turn the call to Brad to discuss the second quarter financial results and our financial outlook in more detail.

Thanks, Steve. Good morning, everyone.

I'll start with a review of our financial performance in the first quarter with revenue on slide 10. Revenue was $408 million, down $24 million versus Q2 2014.

North America Energy-from-Waste revenue declined $16 million year-over-year on a same-store basis, primarily, driven by lower commodity prices. Waste and service revenue was flat with higher same-store price offset by lower volume due to maintenance outage timing.

Energy revenue declined by $8 million and recycled metal revenue declined by $9 million, both driven by lower year-over-year prices with small offsets from higher volume. EfW contract transitions were net negative $5 million year-over-year on revenue, which included a $2 million decline in debt service revenue.

EfW transactions, our net new business, netted to zero in the quarter, with the contribution from the Pinellas County facility operating contract, which commenced in December of 2014 offset by the Hudson Valley facility operating contract that ended in mid-2014, and the conversion of our Wallingford facility into a transfer station in March of this year. Outside of North America EfW operations, construction revenue was lower by $14 million year-over-year with lower revenues from Durham-York partially offset by a few other small construction projects at other facilities.

All other operations were up $11 million with the transportation and logistics component of the New York City MTS contract and new TSD facility revenues partially offset by lower biomass revenues. Moving onto slide 11, adjusted EBITDA was $83 million in Q2 2015, compared to $121 million in the same quarter last year.

The year-over-year decline was driven by lower energy and recycled metals prices in the North America EfW business, totaling $18 million and $11 million year-over-year impact from waste and service fee contract transitions in the quarter, which we had discussed as part of the outlook for 2015, and higher maintenance expense of $6 million; again, driven by the timing of scheduled maintenance in the quarter. Other factors netted out to a $3 million negative with costs incurred for the Durham-York project partially offset by the positive impact of the cost-saving and efficiency programs as well as a small contribution from the TSD acquisitions.

Turning to slide 12, free cash flow was negative $40 million in the second quarter, compared to positive $15 million in Q2 last year. The primary driver in the decline in free cash flow was the lower adjusted EBITDA that I just described.

There was also an $11 million increase in maintenance CapEx associated with the greater amount of scheduled maintenance this past quarter. This delta is presented under the previous accounting method for maintenance of publicly-owned facilities, so it's apple-to-apples with last year and our calculation of adjusted EBITDA.

However, under the new accounting method that I described last quarter, the maintenance CapEx increased by $4 million as you can see on slide seven. We also saw a cash outflow in the quarter related to working capital in a few areas of the base business, which is simply timing.

Now, we'll move on to our growth investment activity and outlook. Please turn to slide 13.

We made $18 million in investments for organic growth so far this year. This is primarily associated with additional metal recovery projects.

I'll note that we now plan to spend a bit more on organic growth this year than we had previously presented on this slide, specifically, on metals opportunities. You'll note that we've broken out the capital expense for the emissions control system at the Essex County facility.

We thought this detail will be helpful in thinking about future growth CapEx. We also continue to invest in infrastructure to support the New York City contract this quarter.

We're now at $19 million for the year; we have about another $20 million to go primarily as we complete the build-out of the new rail yard at our Niagara facility. Construction of the Dublin facility is on track and we spent $90 million so far this year.

We expect that we will spend between $200 million and $225 million in 2015 translated in U.S. dollar terms.

We also completed the acquisition of AWS, as Steve had discussed earlier, for $48 million. The business will contribute over $40 million of revenue annually.

In terms of entry multiples for these types of acquisitions, you can expect us to pay around 7 times EBITDA as a general rule of thumb. These are not cookie cutter deals, but 7 times is an appropriate number to expect as an overall average.

We would then target to bring the effective investment multiples down below 6 times after synergies over time, and generate unlevered returns on invested capital in the low-teens to mid-teens at a minimum. So these strategic investments are solidly accretive.

All-in, we're now planning to invest between $350 and $375 million in 2015 towards growth projects based on currently identified and committed projects and the current foreign exchange outlook for the Dublin investment. However, keep in mind that the call on domestic corporate cash from these investments is far smaller.

The Dublin project construction has been funded largely from offshore cash, and now moving forward, project subsidiary financing. We also plan to fund the Essex County emissions control upgrade with long-term tax-exempt bonds.

And we've been financing the equipment required for the New York City MTS contract with attractive lease financing. So, all-in, we're only funding about a third of the total investment presented here with existing corporate liquidity.

As we've said in the past, to the extent that we secure new investment opportunities that meet our return thresholds, either acquisitions or CapEx, we'll revise this outlook as the year progresses. So, for example, we're not going to forecast additional TSD acquisitions unless and until, those opportunities come to fruition.

While on the topic of investments, I'll provide some additional details on the swap and sale of our interest in China that we announced last month and Steve discussed earlier. Our China operations, consisting of two equity method investments and one consolidated facility, contribute approximately $20 million in adjusted EBITDA annually.

Overall, the implied enterprise value of the transaction represents an adjusted EBITDA multiple of little over 7 times, and the sale proceeds represent approximately 2 times book value and an even more attractive multiple on our original cash investments. As of June 30, we're accounting for these as assets held-for-sale on the balance sheet.

And once the transactions are completed will account for our remaining interest in Sanfeng Environment, as investment at cost. So based on the expected closing time line, we'll lose this P&L contribution by Q4.

We'll then look to reallocate this capital into other investments, either in the U.S., China, or elsewhere, to the extent that they satisfy our strategic and return criteria. Now turning to slide 14, I'll comment on our balance sheet.

Net debt was approximately $2.3 billion as of June 30. The net debt to adjusted EBITDA ratio was at 5.3 times, up from 4.3 times last quarter, as adjusted EBITDA was lower in the first half of 2015 versus the first half of 2014 and we utilized cash balances and revolver borrowings to fund continued investment activity in the quarter.

Leverage will likely remain elevated relative to our long-run target of approximately 4 times, while we're investing in Dublin, New York City, and other growth opportunities. Once these are completed, our leverage ratio will decline dramatically, especially, once Dublin comes online.

These investments are accretive, not only to shareholders, but also to long-term credit quality. I'll close with a review of our revised 2015 guidance.

Please turn to slide 15. As Steve discussed, the revision to our guidance ranges was primarily driven by two specific issues: the delayed start-up of the Durham-York project and a further decline in metal prices since the beginning of the year.

The impact from Durham-York is expected to be approximately $20 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 with the deferral of commercial operating revenue into 2016.

I'll reiterate what Steve said: this is a one-time impact this year. In addition, we now expect lower recycled metal prices to impact adjusted EBITDA by approximately $10 million in 2015 as compared to original guidance.

As we laid out at the beginning of the year, our original guidance contemplated a fairly wide range of potential recycled metal prices, which we felt was appropriate given uncertain market outlook. We're still within that range.

So this impact alone would not have materially changed the outlook for the year. But together with the Durham-York construction impact, it has contributed to our revised ranges.

Bottom line, if it weren't for this one-time hit from the Durham-York project, we'd be on track for the year. In terms of free cash flow, we're now forecasting a cash outflow related to working capital timing of approximately $40 million, as compared to the original guidance, which had anticipated working capital to be relatively neutral this year.

Approximately, half of this amount is associated with Durham-York construction milestone payments that based on the revised timeline will be pushed into 2016. The rest is primarily related to accruals in the base business for employee incentive compensation.

Both of these items will reverse in 2016 and benefit next year's free cash flow by the same amount; in other words, an $80 million swing year-over-year. Before I move to Q&A, I'd like to take a minute to discuss one key question that undoubtedly many of you have.

How this year's revised free cash flow outlook impacts our long-term outlook on the business and our capital allocation decision-making, specifically, regarding our dividend. The answer is short and simple.

Our revised outlook for reported free cash flow in calendar year 2015 will have no impact on capital allocation. Let me repeat that even more bluntly.

This revision will have no impact on our dividend. The drivers that led us to revising our guidance ranges are primarily one-time in nature, especially, when looking at free cash flow.

In fact, 2016 should be a significant free cash flow year, given the working capital movements that will now move cash flow from 2015 into 2016, as well as several other expected positive drivers in the business next year. We make capital allocation decisions based on long-term outlook, not short-term swings, especially, from working capital timing.

As I discussed previously, our board has decided to establish a regular pattern of reviewing the dividend annually for potential increase in December. We're not going to deviate that from that now.

Our goal and our expectation remains growing free cash flow sustainably over the long term and growing our dividend along with it. That has not changed.

We would not have established our dividend at its current level, it wouldn't be secure when periodic results had a bump in the road, nor would we have set it at this level, if we didn't intend to grow it. I look forward to seeing many of you next month at our Analyst Day.

We have a lot of really existing things happening at Covanta that give us a high degree of confidence in the long-term outlook for the business and the senior team here looks forward to discussing these in a lot more depths than we've done before. With that, operator, let's open the line for questions, please.

Hey, good morning, gentlemen.

Good morning, Ben.

Good morning, Ben.

Just as far as construction goes, I know you guys do maintenance all the time and CapEx at your plants and you've also done expansions. Is there anything that new groundbreaking or that has major technology risk with getting plant online by your Q1 schedule, or maybe earlier that you haven't seen before in your other work?

Yeah. Let me take that.

With Durham-York, we're facing several discrete issues. The other thing too to think about is Durham-York project is the most advanced plant built in North America.

And so it has some unique challenges. So let me be clear about the things that we're working on right now.

First is the project. And the project execution involved more hand-offs than usual related to contractors and also certain equipment.

So, for example, the boiler and the air pollution control equipment where we're having some of the issues, and they're pretty advanced boilers and APCs. They were both purchased directly by Covanta from a third-party supplier and then handed off to the contractor to install.

That didn't work out so well, and we're fixing that. Second, the plant has a very complex air pollution control system.

The analyzers that run this system are located both at the inlet and the outlet of the baghouse. The analyzers that are located on the inlet side are unique in that they operate in a very tough environment; very corrosive.

So it's been taking up some time and money to get these analyzers to work correctly. Third, we're working through mechanics related to the electrical grid connection in Canada.

There is some challenges there. And then, finally, this is a high efficiency plant design.

And so this gets to your question in – maybe in the most detail, Ben. This efficiency has required some further design modifications to the boiler to obtain a necessary level of steam temperature for the turbine.

So our steam temperature is not high enough. And this is the primary driver of the upcoming outage that we're conducting.

We're going to do some work on the boiler and some other areas of the plant. But there are the things that we're faced right now – we're facing right now.

And there, the cost and the timeline is all based on solving those issues.

Okay. My second question.

I think on the last call, you talked about your growth opportunities, and you guys did a good job here as well. I think we left some of us the call last time thinking we've been through this before where we went to China and saw China didn't grow there and then to the UK.

I guess, what's different this time, and how are you going to narrow the focus, so we don't have those missteps that we did in the past? And thanks a lot.

So I think the China investments have come out pretty darn good, Ben. If you look at the press release that we put out on that – and a lot of companies have trouble making money in China.

We went in 2007, developed several plants with the swap and the sale that we're looking at right now. We were basically getting a good valuation on those assets.

And we're approximately doubling the book value on the sale. So I think China's turned out pretty well, as both Brad and I have talked about, we're going to get some cash proceeds in from that sale.

And we're looking at how to – what we do next with the capital allocation associated with that capital. With respect to places like the UK, we spent a lot of money there, ramping up development activity.

We're going to be a lot more disciplined in how we do business development. I don't think you're going to see us announcing developing – building larger development teams in certain countries.

I mean, we'll do some business development. There is other ways to do business development where you get involved in plants that are already through some of that process.

You might pay a little more, but if the financial still works, that's a potential – a cheaper way to do business development. And then, the last thing and we'll talk about this at the Analyst Day, we're going to – we're looking at the various geographies around the world, including the U.S.

There are some opportunities in the U.S., and we're going to break down why we like certain geographies, why we think the drivers – what the drivers are in those geographies. And there's going to be places that we're not going to participate in.

And I think it's incumbent on us to say where we're not going to participate as much as where we're going to participate, so.

And, Ben, I would just quickly add that from an IR perspective, as we're pursuing development projects, I mean, developing waste-to-energy projects, anyone who's familiar with Covanta and our history or the industry knows, it's very difficult, it's very time-consuming. There are a lot of twists in the road.

Certainly, Dublin is a great example of that. You're not going to hear from us a lot of detail blow-by-blow on every step of the way on potential development projects as we move forward here.

And so our hope is that, to the extent we have an opportunity that is ripe enough to – for us to number one, invest a significant amount of time and capital into bringing it across the finish line and also to engage our public shareholders and bringing them up to speed that those opportunities are going to be sufficiently developed.

Great. Thank you, guys.

Thanks, Ben.

Hey, good morning, guys.

Good morning, Tyler.

Good morning.

Hey. So I hate to beat the horse here.

But I do want to be just, kind of abundantly clear. So you basically guided to $30 million lower on EBITDA.

But it sounds like $20 million of that was from this one-time charge this quarter with Durham. The other $10 million was from weaker metals, in my opinion, the Street was largely privy to.

So, I guess, another way, if you look excluding that charge, you guys just simply guided to the lower half of that original EBITDA guidance range, is that fair?

That's absolutely a fair takeaway. Yeah.

Okay. Good.

I just wanted to make sure we're clear there. Second, and, Brad, I hope you don't – or I hope I don't throw out too much here.

And I know you haven't provided the 2016 guide. But if we can think about the big puts and takes for next year.

So next year, we're not going to have this big Durham charge. We're going to get a little bit from the Durham operations.

You'll continue to benefit from special waste. You're going to get the rollover benefit from the AWS acquisition; sounds like that may be a few million bucks.

Then you get the negative – sorry, you get the positive impact from the Fairfax transition and the continuation of the New York City ramp. I guess, on the take side, you lose a little EBITDA from the China JV sale.

But outside of that, is there any big other buckets besides, call it, energy prices and waste inflation?

Nope. I think you've pretty well summarized it.

Okay. Well, that's great.

Thank you.

I guess, the one other – yeah, the one thing that we've got to give you more color on is the continuous improvement. And so we've done some work at one of our facilities already.

We'll talk a little bit about that at the Investor Day also. But there is going to be some – I think some cost upsides.

And I'll get into more of that. I want to – we're trying to hire a Vice President of Continuous Improvement right now.

Once that person comes on board, I'll be giving you more details on how I see that kind of playing out over the longer term.

Okay. Excellent.

Yeah, we'll definitely be listening for that. Thanks.

Okay. Thanks, Tyler.

Good morning, guys.

Good morning, Al.

Good morning, Al.

I'll just jump right into this and obviously a caveat here is I've not operated one of these plants in a while or built one. So with that, as the background and the commentary you provided earlier, Steve, I was wondering if you could help us grasp, for the lack better word, that the cost that you're undergoing or incurring, you kind of got your arms around it in terms of what could be forthcoming.

So, in other words, are you going to be coming back to us, a), it was an update, I imagine; but, b), to what extent, should we be looking for additional cost to get this plant commissioned, and then, therefore, contributing January 1, 2016?

Yeah. Now, that's a good question.

As you can imagine, I'm pretty ticked off at how this has all played out. The project has slid.

And I've been pushing hard on the team here. But given all the information that we know, we believe that our updated guidance accounts for all the anticipated impacts associated with getting this facility to its commercial operation date.

Now, you realize these things, but this plant is actually processing waste. So it's taking in waste.

Parts of it are not operating at the optimal spec for us to pass our performance guarantees. And so we've taken all that into consideration on what we need to do, both from a cost standpoint and a timeline standpoint, so that we can pass the final performance test.

And that's all been loaded in our updated guidance and then accounts for these anticipated impacts. We don't expect any additional issues.

And I've been pushing real hard on this, because this has not been a good situation for us.

Understand. And then, I realize you can't comment on it, but how do we think about the litigation exposure?

Yeah. I'm not going to be able to comment on it.

We're in the midst of litigation with the contractors. I mentioned there were construction delays and issues around that.

So I really can't say much about that at this point, unfortunately.

Yeah. The only thing, I think, we can say is that the way the accounting works, our accrual at the end of the second quarter reflects management's best estimate of the outcome positive or negative of any of the litigation claims going back and forth.

And we stand by those numbers and feel good about it.

Great. Thank you.

Thanks. Good morning, everyone.

Good morning, Dan.

Good morning, Dan.

Just a quick follow-up on China, and, I guess, their reallocation of capital. So just going through the numbers, you mentioned maybe in exit at about 7 times EBITDA.

That seems a little bit on the lower side, particularly, given where you're investing, for instance, for Dublin. Can you maybe qualify a little bit what that delta is?

And maybe was there a diminished view on the outlook for those assets in China? Or is that just structurally the Chinese assets are lower multiple than maybe when you see rest of the world?

Hey, Dan, it's Brad. Not necessarily that structurally you have lower valuations in China than you do elsewhere.

I think, in many circumstances, it's quite the opposite, actually. Remember that part of our China operations, as they exist today and will until our swap is a coal-fired generation plant, which in our DCF yields a much different value than the profile of the energy from waste plants.

So that's actually the most straightforward way to explain it.

So you're saying the exit multiple on the EfW plants would have been much more attractive, and perhaps, at a premium, so perhaps, even when you're investing in Dublin, which is obviously, by our numbers, certainly, above like a 7 times number?

Yeah. That's exactly right.

Yep.

Okay. And then, real quick.

Can you maybe – you talked about the ramp in New York City. Can you maybe talk – give us an update as it relates to Manhattan?

It sounds like you'll be at a full run rate on Queens later this year. Do you have any thoughts on maybe when you'll start ramping up on the other side?

Yeah. On Manhattan – the New York City is still building the MTS there.

So we're still kind of waiting for their notice to proceed. I mean, the Queens MTS, just a digress, I mean, Queens MTS is running really well.

As we expected, we're in the ramp-up phase, which will continue over next several months. As of this month, the good news is, we're paid our full service fee.

So we're happy about that, but yet not a lot yet on 91st Street Manhattan MTS. The city is in the process of building that still.

Got it.

And no change to our outlook on it.

Yeah.

You still expect to get it done. It's just a question of when?

Exactly.

Yeah.

Got it. Thank you.

Thanks, Dan.

Thank you, Steve and Brad, for taking my questions. On the guidance revision, of the $20 million that's Durham-York, there is piece of it – delayed revenue part that you get back; the other part you actually had to spend some money.

So if I think about walking from your midpoint of your revised free cash at $150 million in 2015, I can add $80-plus million, some piece of the $20 million, that's my starting point for a midpoint next year. Fair enough?

I would say that in that analysis, you would add back the full $20 million.

In the context, it's non-recurring, and, therefore, that cash is still available next year?

Correct. Not to imply that – it isn't a real cash loss, it is, but...

It doesn't recur, yeah.

Right. Okay.

Fair enough. And then, all of those things Steve alluded to earlier, which productivity improvements and then Tyler's commentary around Fairfax and all those things, they get added on top of all that, theoretically?

That's right.

Okay. The $70 a ton in the un-contracted tip fee, is there anything that was, hey, you had a really cool one-timer on the special waste side drove the number really high, and then, therefore, that number might tip fee – should we think about this $70 is the new number, because the special waste team has managed to shift the mix that way?

We didn't have any special events, one-time special project that we're working on. Our sales team's doing pretty well out there.

So the special waste programs has been real a bright spot for us. So will it be $70?

It may not be that high all the time. But, I mean, that's a pretty good number as we look forward.

Okay.

What you're seeing in that number as an example of this quarter is the growth in the special waste really, obviously, now impacting the overall average.

Right. That's what I presumed.

And I just wanted to know how lumpy that can be based on the nature. How much of your special waste at this point has become a recurring source at a number versus you found some one-time items, that's a guess what I was trying to get at.

Yeah. This isn't really project or – one-off – job-related ...

Job-related, yeah. This is – the vast majority is recurring volumes.

Okay. And then, the AWS GARCO kind of deals, how do you think about – let me frame this: I'm under the impression that you're going to be able to modify your permit and direct inject into your boiler these liquids and so it effectively becomes a capacity expansion.

How do you think about as that plays itself over time, is that a kind of a – up to a 5%, so it's like an – the equivalent of an incremental million tons over time? Is that the way to think about this?

I'd say, I think you're thinking about it the right way operationally. I think the impacts on increased capacity isn't that significant.

And the way the economics would work is the – I wouldn't even necessarily describe it as a capacity expansion, per se, for solid waste, not in any material way. It's just that at facilities where we have this ability both in terms of permit as you cited, and operationally, that we can inject liquids, which earn a tip fee and do not absorb any of the heat capacity, which you're referring to.

Yeah.

And those liquid tons come in at a much lower tip fee, but from a capacity standpoint, they are free. So you are getting capacity add-on, but it's coming at a lower tip fee and I would say, you're probably overestimating the potential impact, if you're talking about a million tons a year.

Okay. And so when you say lower, if the blended average currently is 50, it's coming in less than the blended average?

That's correct. The averages as we present them here so that it's clean without that impact is for solid tons only, which would be incremental.

Okay. All right.

And then, just a clarity on the China, the $20 million number you alluded to, Brad, I'm assuming that whatever fourth quarter impact, that's all captured in your revised guidance, too. So there is some piece of China's in the guidance revision as well?

Yeah. That's right.

I mean, we've revised the guidance for the two big items that we described at length and there are obviously lots of other ups and downs in the business. We'll lose the China revenue; we have the TSD revenue coming on so – or EBITDA, rather.

So, yeah, that just gets lost in the mix.

Right. And then, we're in a President's political cycle.

So there's a lot to chatter about taxes. If we did, in fact, actually got a tax holiday, would you bring the $110 million home?

Or are you just leaving it offshore, because that's the better likelihood of redeploying it?

Well, we have – it's difficult to answer that in a vacuum, because it would depend on the investment opportunities that we have, if any, and where they are. I would tell you, though, one detail of the proceeds is that about half of the proceeds will be coming back to the U.S., anyway.

Actually, one of the interests that we're selling is held by a Delaware Corp. So half will be in the U.S.

whether we like it or not.

And whatever the negative tax consequences of that?

Yeah. It will have tax friction, but, of course, we have the NOL.

Okay, okay. Great.

Thank you.

Thanks, Michael.

Good morning, guys.

Good morning, Scott.

Good morning, Scott.

So, Steve, I think you were clear with regard to how the Dublin construction processes is different and your confidence level there. But maybe just to push on the Durham-York experience, I mean, is there anything here based on this experience that you guys do differently do you think on a go-forward basis with these construction projects?

Do you really view these things that have occurred here and the issues as endemic to that individual project and there's nothing that you really do differently from a tactical, or a strategic point-of-view with regard to construction?

Yeah. It's interesting.

I've been involved in previous life a lot of construction projects. So what's happening here as much as I'm not happy about it and I've been very clear with you folks, and internally, sometimes projects go bad and there is litigation associated with it and there is delays.

And so I think that's happened on Durham-York. If you go to Dublin, for example, and now that – we didn't set it up this way, because we had decided on the Dublin model a few years ago.

But I think we're all liking this now. In Dublin, the EPC, so the engineering, procurement, construction work, our contractors is Hitachi Zosen.

And the EPC generally provides the guarantee or you probably heard the term wrap. So they're wrapping the project, which, basically, means that they're providing the guarantees on waste throughput, power output, environmental emissions, all the performance guarantees.

Now on Durham-York, Covanta's providing that. In Dublin, it's coming from Hitachi Zosen since they're building and constructing the feed chute, so the trash coming in through the plant's emission stack.

And so that's it from a Covanta standpoint. With Dublin, that's a good spot to be in.

Now, the issue around those types of contracts, EPC's where you have the – where the EPC contractor provides the wrap, they can get pretty expensive. Now in Dublin, we're still able to make great returns and get the EPC wrap.

You can't get those all the time. And so sometimes, it depends on the market.

My experience down in the Gulf Coast, for example, in my previous role was you couldn't get EPC wraps for a while, when the Gulf Coast construction was really hot there for a while. So a lot depends on what the construction market's like.

But, certainly, Dublin's got a different risk profile. And as we look to do things more internationally and migrate our capabilities from North America, I think we'll be looking for these types of EPC wraps versus what – the approach that we took in Dublin.

Got it, and thanks. And then, as my follow-up here, just to clarify, I think toward the end of your prepared comments, did you say you expected both EBITDA and free cash flow to grow meaningfully in 2016?

Or was that just free cash?

We expect both to grow in 2016.

Yeah.

Meaningfully in 2016?

Yeah.

Got it. Okay.

We'll wait for the details at a future time then.

Yeah. Okay.

Great. Thank you.

Thanks, Scott.

Good morning. First, just a couple of quick things about the China joint venture.

So just talk about the $110 million, is that – will that be RMB or USD? And also, it looks like you are going to realize about $46 million – roughly $46 million profit.

Is that a number including your guidance or that's just going to be a one-time item?

Yeah. The $110 million is – that's fixed in U.S.

dollar terms, and $110 million is approximate. And then, sorry, JinMing, your second question about the 2015 results?

No. The sale, I think, is going to result somewhere about $46 million in profit...

In terms of the gains?

Yeah.

Yes, that will be one-time this year, yeah.

Yeah. That's right.

Okay. And some time ago, I think it's 2009, you signed another letter of intent with another Chinese company.

I think it's called Chongqing Environmental (55:16). Have you had anything with that company?

I haven't heard anything.

No.

Okay. Okay.

Lastly, about the – it looks like, what is your long-term energy strategy? It looks like much of your (55:35) will be off contract in the next couple of years, so given the current low natural gas price, what is your strategy here?

Yeah. We're doing some work right now.

And we're going to – we'll talk about this at the Analyst Day. Sami Kabbani, who runs that group will be speaking.

We're looking at a number of different options on how to get more value out of the power that we produce, because, as you pointed out, JinMing, we're going to get more power. That's our responsibility, our place in the market.

And so rather than just selling into the ISO, kind of, day ahead, or same day, we're looking – and because, we also do have a – we have a – it's a renewable power source, a baseload renewable power source. We're looking at whether there is certain companies that want to contract directly for a renewable power, particularly, baseload renewable power.

There are companies out there because of their sustainability objectives where they're looking for renewable power versus other types of power. So we're looking at those, and we're looking at some other opportunities to get more values as we get, kind of a bigger slice of the power revenues.

Okay. Lastly, just on the Durham-York situation, does that the $20 million reserve include a obligation to the local governments?

Yes. It includes liquidated damages that are payable to our client under our contract.

Okay. Good.

Thanks.

Thank you.

Good morning, everybody.

Good morning, Barbara.

Good morning.

With AWS you acquired a lot of service capability – wastewater treatment, food waste, industrial cleaning, other kinds of both non-hazardous and hazardous waste services. So I know it is early days, but can you tell us in which of these services you see the most opportunity – and Steve, this is a question for you, I guess, but strategically speaking, is it important for Covanta to evolve from a pure-play waste to energy company into more of a comprehensive waste services provider?

Yeah. So one of the things that I've mentioned is to several folks who I've talked to is that we have this backbone of 41 Energy-from-Waste facilities in the U.S.

that are unique. Because there is not going to be, at least, in the short term, I don't see a lot of government support for new Energy-from-Waste facilities.

And so one of the things we started to look at is how can we, kind of, move down the chain in and around these 41 facilities and industrial waste services, or environmental services, whatever term you want to use. There is an opportunity to do that.

So we get the services and solutions revenues. We expand around – in and around our plants, and then, we're able also to help to drive our special waste program.

So if you think about these types of businesses, whether it's AWS or GARCO, one of the things they do, for example, and this isn't the only thing they do, but they'll go out to industrial companies and clean out tanks and obtain various wastes, that's non-hazardous waste, that doesn't necessarily come to Energy-from-Waste facilities now, but can. And we'll be able to, kind of, divert that waste to our facilities.

So there is a lot of synergies between doing these services in and around our plants and the waste that ultimately these service providers accumulate. And so that's really how we're looking at this.

And it's a good opportunity to grow in the U.S., and we like the returns and the multiples that we've been able to pay. And so it's an area that we'll continue to focus on.

At our Investor Day, we're going to talk a little bit more about this, too, because I realize, particularly with AWS, we didn't say a lot about that when that deal occurred, because we wanted to give you, kind of, a full briefing on the environmental services business at our Investor Day, and we're going to do that.

Okay. Thanks.

Sure, Barbara.

Hey, guys. Thanks for fitting me in here.

Hey, I've got a bigger picture question about on the waste side. So I'm looking at 20 million tons of disposal annually.

We estimate that maybe more than half of that is, call it, North of Virginia; you've got the very, very strong asset position in the New England Market. There's been a lot of talk about disposal tightening in coming years in that market.

And I'm just curious how you think about that. I mean, I'm looking at two very large tip-fee waste merchant facilities up there.

Do you think there's an opportunity to maybe push price in that market above inflation?

Yeah. I think there's going to be markets.

And you're pointing out a couple of them. There's going to be markets where because of landfill closures and other dynamics, I think there's going to be a little more pricing power than there was in the past.

Okay. That's great.

And then, Brad, I'm curious, are there any opportunities on the debt side to refinance? I mean, do you have any callable features to the senior notes anytime soon?

Yeah. Our senior note due 2020 are callable for the first time this December, actually.

So, yeah, we're – given the coupon on those notes and where the leverage from finance markets are currently, there is an opportunity there for some savings.

Okay. So you guys are definitely looking at that?

Yeah. Absolutely.

Okay. All right, well, thank you.

Thanks, Tyler.

Hey, thank you and I appreciate, Tyler, for setting this up, actually. So garbage, as an industry, has been talking about improving volumes.

What was your volume outlook in 2Q? Were you like very full as a result because just good volumes are happening?

Yeah. There's been a lot of waste volumes out there in Q2.

So that's a good point.

And this is not unique to one geography. Everything is either full in some places maybe or overfull.

That's correct.

Okay. And then...

And, Michael, you look at – we've been scratching our heads on this a little bit, saying, is it the U.S. economy driving this?

There are some areas and we have talked to some of the clients about, you know what, why we're seeing more volume and people are still trying to sort this part out. But there are more – there seems to be a lot of volume of waste out there in Q2.

Well, I would certainly tell you, I think if you look at just the plain vanilla garbage companies, their commercial weight per yard trends have been in this steady upward movement. And then, the construction cycle tends to be getting new business formation and improves that a little bit further.

So I think that's what you're seeing.

Yeah. Okay.

Commercial market. And then, one clarification in Durham-York, you have a long-term operating agreement there.

None of what's going on has put that at risk, has that?

No, no. In fact, we're working closely with the client to work through some of these issues.

So – and we've been staying pretty close with them.

Okay, great. Thank you very much.

Thanks.

Thank you.

Thank you. Thanks for joining our call today.

I hope you were able to gain greater understanding on our business drivers and outlook. We appreciate your participation.

We look forward to seeing everyone at our Investor Day on August 12, where we'll have an opportunity to get into greater detail on the various pieces of our business. Thanks, again.