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Covanta Holding Corporation (NYSE:CVA)

Q4 2012 Results Earnings Call

February 7, 2013 8:30 AM ET

Executives

Alan Katz - Vice President, Investor Relations

Tony Orlando - President and CEO

Sanjiv Khattri - Chief Financial Officer

Tom Bucks - Chief Accounting Officer

Brad Helgeson - Treasurer

Analysts

Hamzah Mazari - Credit Suisse

Sanjay Shrestha - Lazard Capital Markets

Gregg Orill - Barclays

Michael Hoffman - Wunderlich Securites

Al Kaschalk - Wedbush Securities

Stefan Neely - Avondale Partners

Chris Kovacks - Baird

Barbara Noverini - Morningstar

Carter Driscoll - Ascendiant Capital Markets

Operator

Good morning, everyone. And welcome to the Covanta Holding Corporation’s Fourth Quarter and Full Year 2012 Financial Results Conference Call and Webcast. This call is being taped and a replay will be available to listen to later this morning. For the replay, please call 877-344-7529, use the replay conference ID Number 10023855. Webcast also be archived on www.covantaenergy.com and can be replayed or downloaded as an MP3 file.

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, Keith, and good morning. Welcome to Covanta’s fourth quarter and full year 2012 conference call. 2012 was a great year for Covanta. Our stock performance has been great -- a very exciting year for the IR team, and Clare and I look forward to working with you for another great year. I’ll be back on the road soon and hopefully, we’ll be able to catch up with many of you.

Joining on the call today will be Tony Orlando, our President and CEO; Sanjiv Khattri, our CFO; Tom Bucks, our Chief Accounting Officer; and Brad Helgeson, our Treasurer. We’ll provide an operational and business update review, review our financial results, and then take your questions.

During their prepared remarks, Tony and Sanjiv 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 the website. These prepared remarks should be listened to in conjunction with those slides.

Now on to the Safe Harbor. The following discussion may contain forward-looking statements and our actual results may differ materially from those expectations. Information regarding factors that could cause these 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 7, 2013. We do not assume any obligations 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, reconciliations to the most directly comparable GAAP measure, and management reasoning for presenting such information is set forth in the press release that was issued last night, as well as the slides posted on our website. Because these measures are not calculated in accordance with U.S. GAAP, these should not be considered in isolation from our financial statements prepared in accordance with the GAAP.

It should also be noted that our computations of free-cash flow, adjusted EBITDA and adjusted EPS may differ from similarly titled computations used by other companies.

With that, I’ll now turn the call over to our President and CEO, Tony Orlando. Tony?

Tony Orlando

Thanks, Alan, and good morning, everybody. Let’s begin with a quick summary of the year. For those of you using the web deck, please turn to slide three.

This was an excellent year operationally for us. We achieved record boiler availability again. We renewed a number of contracts. We completed several important financial transactions. We doubled our dividend and we bought back over $5 million in shares.

I plan to spend most of my time today looking ahead, but let me first review how we did last year. Like many other power companies in the Northeast, we were impacted by Hurricane Sandy and our team work tirelessly to get our facilities back up and running as quickly as possible.

We had 12 facilities affected by the storm. Within two days all but our Essex and union locations were back online. These two New Jersey facilities sustained flood damage and our team did remarkable job to repair the damage quickly. This enabled our municipal clients to process waste during the crucial cleanup period and it limited the financial impact to Covanta.

Of course, I’m not happy that our results were basically flat. But given the fact that year-over-year both energy and metal prices dropped significantly, and we had to absorb Sandy’s punch, our results really were pretty good.

Looking back to see how we did against our guidance that we initially issued at this time last year. If you adjust for Sandy, as well as the energy and metal market price declines, using the rules of thumb that gave you, our 2012 adjusted EBITDA would have been right in the middle of the original guidance range and free cash flow would have exceed the guidance.

We also accomplished several things to solidify our long-term outlook. Notably, over the year we renewed quite a few waste and energy contracts, these contracts totaled $2.5 billion in revenue with an average term of 12 years.

We also form several partnerships aimed at creating future value, the one that I most optimistic about is our partnership with the German company called TARTECH to recover metal from ash previously deposited in landfills. Hopefully, our joint venture will be in a position to invest in its first recovery project this year with returns coming in 2014 and beyond.

In addition in the fourth quarter we closed on the acquisition of our Delaware Valley facility, which was immediately accretive to financial metrics and we took advantage of strong credit market by refinancing over $300 million project debt, which extended the weighted average life by over 20 years and lower the interest rate by about 50 basis points. So a solid year despite the external factors that I mentioned.

Now let’s move on the business outlook. We’ll start with waste on slide four. Our view of the waste markets remained unchanged from the last earnings call and I’m pleased with the job our team is doing to secure waste in this competitive market.

Over the past several months, we’ve renewed our contracts with 14 towns in Connecticut, including the anchor client for our Bristol facility. This capped off a great year for waste contract renewals with seven major contract extension and all totalling 2 million tons of waste per year with an average term of 11 year.

This is a real testament to the work our team does to provide clients with excellent service. These strong partnerships give our customers and Covanta great predictability. In fact, our waste revenue for 2013 will remain approximately 80% contract.

Overall, our 2012 Tip Fee pricing was up about 1% compared with 2011. I’d previously mentioned that we have both above market and below market waste contracts, but given the persistence market pressure more conduct are now above market and several of the commercial waste contracts that are rolling off in the next few years also fall into that category.

We are working to offset this challenging long-term trend by improving the mix of waste at our facilities by targeting special waste and customers focused on zero rental disposal. Continuing to grow our special waste business particularly important, we ended the year with over $55 million in special waste revenue and we plan to continue growing this business by double digits.

So let me summarize the 2013 waste revenue outlook, when considering the general market conditions, contract transitions, special waste growth, contract escalations and a $60 million reduction in debt service revenue, we expect our total waste revenue this year to be about the same as it was last year.

Let’s move on to metals on slide five. We made some good progress on metals last year, although we did quite get as much done as we have hoped a year ago when we set an aggressive 2012 schedule for ourselves.

Nonetheless, the new recovery systems installed are performing as anticipated and we manage the whole metal revenue essentially flat when the market prices dropped about 10% for the year.

Just a quick recap of last year, the full year average HMS #1 market price was $368, a $42 decline from 2011. Remember our 2012 rule of thumb metal was at $50 movement in the market price will be approximately a $10 million impact on our annual metal revenue. The actual market price impact to our adjusted EBITDA for 2012 was approximately $7 million, so the rule of thumb held very true.

As noted, we are also able to offset the impact of this price decline with the increase in our first recovery and by producing a cleaner product, which reduces the waste sold -- which reduces the waste sold but increases the price we pay.

The current HMS market price is about three-fifth. For our full year guidance for 2013, we are assuming the price stays at current levels. I also want to update our rough rule of thumb for 2013.

Last year about 80% of the metal revenue was ferrous with the balance being non-ferrous. With more non-ferrous systems coming online this year, we expect non-ferrous tonnage will increase modestly as a percentage of the total metals.

If ferrous and non-ferrous prices diverge in a significant way during the year, we’ll have to update the rule of thumb. But for now let’s keep it simple and assume they move in tandem, a $50 movement in the HMS #1 index would be approximately a $10 million to $15 million impact to our adjusted EBITDA.

Let me just pause here for a moment to reflect on the significance of this metal prices assumption. Last year, when we issued our 2012 guidance and our longer-term outlook, we told you it was based on an HMS price in 2012 of $410, escalating with inflation. We are now at $350. That decline adversely affected adjusted EBITDA by $15 million to $20 million.

Hopefully, this gives you some perspective on how the metal recovery has become to our business. So let me get back to some numbers to help you better understand the overall metal recovery story. We are changing the way we report recovered metal because we believe it will make our revenue more transparent.

As many of you know, we share some metal revenue with our clients. We’ve historically provided gross tons recovered. We are going to start reporting net tons similar to the way we report net megawatt hours. A net ton is based on our share of revenue.

Let me explain. If for example, we recovered two tons at our facility where we share revenue with our client 50-50, that would be one net ton. If we recovered two tons at our facility where we do not share revenue with the client that would be two net tons.

Before moving to energy, let me update our near-term metal targets both for this net ton nomenclature as well as our latest thinking. As mentioned earlier, we are little behind our original aggressive schedule to install systems and we are modestly reducing our expectations on ferrous metal tons probably because of the good progress we are making to produce a cleaner product.

We have a lot new systems being installed throughout the year, and I don’t want to get hung up on when they come online, instead I want to focus on what these systems will produce on an annual basis after they are installed. As such, I’m going to provide a run rate at the end of this year.

Our goal is to reach a run rate of 340,000 tons of net ferrous metal and 25,000 tons of net non-ferrous metal by the end of this year. Without being specific for 2013, I assure you we will increase tons recovered, especially non-ferrous. Overall, our growth in metals is still very much on track and we remain confident that this will be a big contributor to our long-term organic growth.

Moving on to our energy portfolio, please turn to slide six. Average natural gas prices for 2012 was $275 per MMBtu, down significantly from 2011 but only down $0.25 from the $3 price that we assumed when we initially issued our 2012 guidance a year ago. Using our 2012 rule of thumb, the drop in natural gas price caused a $3 million dollar decline to our adjusted EBITDA versus the initial 2012 guidance.

In 2013, our total economic energy output from energy from waste facilities will be about 5.5 million megawatt hours. This is an increase of about 700,000 megawatt hours versus. 2012, due primarily to the ethics in Stanislaus pre-contract transitions plus the Honolulu plant expansion and a new steam contract at Niagara.

3.7 million megawatt hours of our output is contracted and 800,000 megawatt hours is hedged, totaling approximately 80% of our 2013 output. So, remaining 1 million megawatt hours are currently exposed to the stock market. So we are entering 2013 with less spot energy exposure than we had at the start of 2012, and therefore we are updating our rule of thumb to reflect that.

In 2013, for every $1 movement in natural gas pricing we would expect to see a $5 million to $10 million impact to our adjusted EBITDA and our guidance is based on current forward curves with a full year average natural gas price of $3.50 per MMBtu at the Henry Hub.

Remember, this is just a rough rule of thumb. We are seeing the New England energy prices de-couple on a temporary basis from Henry Hub. But this rough rule of thumb should be a good indicator on a full-year basis. We will of course revisit this again on the next call.

Notwithstanding the increase in the year-over-year energy revenue, we expect our 2013 overall energy pricing to be flat with 2012 for the following reasons. First, new generation added to the portfolio will be sold at prices that reduce our portfolio average. Second, our 2013 hedges were down at rates lower than the 2012 hedges and third, certain above market contracts transition to market prices.

Turning to slide seven, we thought it will be to useful to spend some time looking at our service fee contract transitions and related energy sales over the next five years. Let’s start with the big picture. The total waste capacity of the facilities that we own is about 11 million tons per year.

Today, our waste capacity of approximately 3 million tons is dedicated to municipal clients under service fee contracts. Over the next five years, the contracts were about 2.5 of the 3 million service fee tons will expire.

It is possible some of our clients who prefer to stay with the service fee arrangement and we would be happy to accommodate that preference. But for this purpose, we simply assume they all convert to a tip fee which we believe is what most clients will prefer.

These transitions will drive a lot of change in the next several years but it’s nothing new for us. We’ve been working through this for quite some time with an excellent track record. These contract transitions are complicated and each is unique, but I will try to simplify.

One way to think about this is we will have some things working for us and some working against us. The most straightforward is the reduction in debt service revenue and billings. We know exactly what that will be year-to-year, so we provided a schedule of this in the appendix which, Sanjay will review. Also working against us, we’ll take on expense that we currently pass through to our clients such as asset disposal expense.

Working for us, we have an increase share, typically 100% of energy, metal and special waste revenues. Excluding the reduction in debt service revenue, the transitions will be a net positive for the bottom line. When including the debt service as I’ve said many times before, the service fee contract transitions and I’m talking about just the service fee contract transitions. They will have -- they have been and they will have -- excuse me, they’ve been creating headwinds for sometime and that will continue for this year and next. It will be relatively neutral in 2015 and then in 2016 we expect it will be a tailwind.

Now, let me turn to our energy exposure. As you can see from this chart, by 2017 we expect to have about 6.5 million megawatt hours of energy and that’s from our EfW facilities. The gain is primarily driven by these service fee transitions. The total increase is almost 2 million megawatt hours with 700,000 increase in 2013 and the remaining increase there after.

After 2013, we will also see about 1 million megawatt hours of fixed-price energy contracts ending and several of these contracts are above market. Also our short-term hedges will expire soon. The combination of all these factors will significantly increase energy market exposure over time, and we plan to manage this by periodically hedging to reduce near-term volatility.

In fact, you can see in the bar chart, we’ve already hedged some of 2014 and later this year we plan to hedge more of 2014 and we look beginning to hedge 2015 as well. So the key point here is electricity markets will have a bigger and bigger impact on our earnings over time. For example, if you look at 2015, we currently have a little over 2.5 million megawatt hours exposed compared to 1 million megawatt hours in 2013.

So a $1 move in the 2015 natural gas price will have about 2.5 times greater impact than the rule of thumb we gave you for 2013. I trust you’ll find this additional information useful so you can take your own view on energy markets.

I gave you a lot of information. So I want to summarize my thoughts and how all these factors will impact the business over the long term. Let’s turn to slide eight to discuss this. It’s fair to say contract transitions have become more challenging in the last few years with soft waste markets and low natural gas prices.

In particular, we foresee 2014 as a challenging year with a significant decline in debt service, revenue and several above market energy contracts ruling off. But assuming the current energy forward curve and stable metal and waste market, I’m confident that our organic growth initiatives will overcome these challenges to produce modest adjusted EBITDA and free cash flow growth over the next five years.

If market prices drop like they did last year, it will obviously impede our growth but we will still have a very stable business with strong cash flow. On the other hand, if the economy picks up and the market prices move in our favor, we have significant upside.

I also want to highlight that after 2013, we are targeting free cash flow growth notwithstanding the expectation of fully utilizing our NOL and paying much higher cash taxes over the course of the next five years. We’re basically looking for the EBITDA growth to more than offset the higher cash taxes.

We manage our business for cash generation and it is very important for us to grow our already strong free cash flow. Of course, we’re also committed to allocating our capital to maximize shareholder return.

In addition to the upside if energy and metal markets move in our favor, we have several growth opportunities that have the potential to create meaningful long-term value. On the development front, I’ll repeat the same thing that I said last quarter. We’re still waiting for the client to make their decision on Merseyside waste procurement, which hope is eminent.

Also, there is nothing new to report on Dublin, we’re still in discussion to finance the project. In the mean time, we’re being judicious with our development spending and returning excess capital to shareholders.

Finally, we have two longer term upsides, while it may seem like a bit of long shot, the President has identified climate change policy as one of the second-term objectives. Energy from waste is already recognized for its climate-change benefits with incentives in Europe and China. If similar incentives were put in place in the U.S., it would be very good for Covanta and for the environment.

In addition, this past year, we introduced our new CLEERGAS technology, which we believe will create development opportunities in the coming years especially in places that have regulatory support for high-energy prices. It’s something that we stay on a cutting edge of technology.

Overall, I feel really good about the next five years. We’ve an excellent team of professionals serving our clients and executing our plans with a very sustainable base business with strong free cash flow, which we intend to grow modestly as Sanjiv likes to say our small G growth and we have our big G growth opportunities development, exposure to energy and metal upside and a strong balance sheet to take advantage of strategic opportunities.

Before I turn it over to Sanjiv, let me close on slide nine with quick recap of 2012 and our outlook for 2013. We manage the business well last year, which provided a great deal of predictability and stability despite the market challenges. And if it had not been for Sandy and the dropping commodity prices, we would have finished at the midpoint of our original 2012 adjusted EBITDA guidance.

I’m pleased that we overcame these challenges and I’m really looking forward to seeing us realize our growth potential over the next few years. In 2013, we expect to grow adjusted EBITDA approximately 5% at the midpoint of guidance. Taking out the impact of Sandy from 2012, that growth would be about 3%.

I also expect our free cash flow to be strong this year and we will remain focused on capital allocation and shareholder returns. I’m confident that Covanta team will turn in another strong operating performance with continued focus on safety, customer service and growth initiatives.

Now, I’ll turn the call over to Sanjiv for his remarks.

Sanjiv Khattri

Thanks Tony. Good morning, everybody and good afternoon to those of you calling in from Europe. Happy New Year. I can’t believe its February already and we’ve already played the super ball. Last year, we had our New England region cricket against our New York, New Jersey region. This year it was our Maryland DC area plants against the California plants. It was a good game with something for everyone including an unscheduled power outage. Congratulations to the Ravens fans.

Now, back to business, we had a very busy end to the year. As Tony described, we continue to make progress on renewing important contracts. In 2012, we signed $2.5 billion in waste and energy contracts for an average term of 12 years, not too shabby.

We also completed several key financial transactions, including the Project Debt financing and the acquisition of our Delaware Valley facility, which will both be significant value contributors overtime.

We also overcame the impact of Hurricane Sandy amazingly well. Our team did a rock solid job getting our facilities back up and running again quickly. So net-net some good milestones to what were the top year during which much of what we control, we did well. And much of what we don’t, we didn’t go as well.

On a lighter note, we have been talking to you about big G growth and small G growth but Alan, I didn’t realize that IR version of growth also included the fattest version of the web deck we’ve ever produced.

Let’s move onto the financials. I’m on slide 11, which lays out our full-year 2012 financial highlights. As Tony discussed full-year results were in line with our updated guidance and excluding the impact of Hurricane Sandy and commodities pricing would have been at the midpoint of our original guidance for adjusted EBITDA and above our guidance for free cash flow.

I walked through the Sandy impact as well as the other drivers of our results in the waterfalls over the next few slides. But before we start on that detail, I want to know that as always on slide 26 of the appendix, we include our more detail summary of the P&L including full-year metrics.

In addition, we have a few other appendix slides that I’d like to flag. Slides 27 to 31 give us detail overview of how we did in the fourth quarter, including the waterfall walks. On this call, I will just cover the full-year performance.

Slide 35 breaks out our revenues for 2012 between contracted and exposed positions including metals, which now has its own Pi. In fact, we’ve broken out metals revenue separately in all of our financial tables. 2012 contracted revenues came out exactly as we had predicted. More importantly, 2013 looks similar to 2012 as well.

Slide 36, another slide you are familiar with, updates you on our impressive performance overtime in renewing risk contracts. By year end 2012, we have renewed 22 out of 23 contracts representing about 77.6 million tons of waste a year, with an average new contract length of 11 years.

On slide 33, we wanted to give you the full schedule of project of project debt repayments including the movements of cash from the restricted funds and the impact to both revenue and adjusted EBITDA going forward for the life of our existing Project Debt.

Finally, on slide 34, we have laid out the impact of the recent tax exempt debt issuance of $335 million on our discretionary cash flow. As a result of this successful issuance, we will have $290 million of discretionary cash available over the next five year that absent any other actions, we would not have had. We are happy to take any questions on these, of course, on the call or offline.

Now, let’s get to work and into the details for full-year 2012. Starting with revenue on slide 12, total revenue for the year was basically flat at $1.6 billion. Our organic growth initiative performed in line with expectations. This bucket included growth in our special waste business and the realized benefit from improving the price we get paid for our metals as well as volume improvement from our non-ferrous tonnage.

It also includes contract escalations, the benefit of construction revenues and increased energy generation from our energy from waste plants versus the same categories in 2011. These gains as well as our new units coming on line were offset by declines in the market prices for metal and energy compared with 2011, as well as the debt service revenue decline that we told you about at the start of the year.

We also had two one-off factors that lowered our numbers this year. The fact that we put our insurance business into run-off and the impact of Hurricane Sandy. Sandy impacted 12 plants including two very severely. The impact from Sandy was $6 million, $9 million and $8 million on revenues, adjusted EBITDA and free cash flow, respectively.

I wanted to note that while metal revenues were down due to the market price, you’d also see in Exhibit 11 of the press release that our net metal volume declined a bit in the fourth quarter. This is due to three reasons.

First, we processed less waste in the quarter largely due Hurricane Sandy. Second, we had some existing recovery systems temporarily shutdown in order to install new and improve systems. Lastly, as Tony mentioned, based on some of the work we did earlier in the year, some of the metals we are selling are cleaner causing reported tonnage to actually drop, but price and total revenue to go up.

Remember, we’ve talked about metals in the context of quantity, quality and price. With the help of our organic growth efforts both quantity and quality will go over time, while the market will determine price. So our total metal revenue will go up if pricing holds.

Moving on to slide 13, adjusted EBITDA was down $2 million year-over-year to $492 million in line with our updated guidance. The benefit from our growth -- organic growth initiatives that I just detailed, as well as our new units coming on line were partially offset by lower metal and energy pricing, the sunset of certain alternative fuel tax credits and the impact of Hurricane Sandy.

If not for the one-time impact of Sandy, we would have grown close to 1.5% this year, despite the challenging commodity markets and year-over-year decline in debt service through billings of that $20 million.

Turning to slide 14, let’s discuss our 2012 free cash flow. Free cash flow was $262 million this year, $20 million lower than in 2011, but at the higher end of the guidance range.

As you can see from the waterfall, the year-over-year deterioration was primarily due to the impact from Hurricane Sandy, higher cash interest associated with our corporate balance refinancing that we completed in March and increase maintenance CapEx of $5 million. For the full year, maintenance CapEx of $85 million came in right in the middle of our estimate of $80 million to $90 million.

As you know, going forward, free cash flow in any individual period will continue to be impacted by construction related working capital, especially as products wind down or ramp up. We’ll see our free cash flow impacted negatively by this in the first half of 2013, especially in the first quarter, but this should reserve in the second half of the year. Our underlying free cash flow from the operations remains consistent, stable and strong.

As Tony mentioned, we aim to grow our free cash flow overtime. Our reported free cash flow has been impacted by construction working capital over the past few years. In 2010 if you remember, this was a significant positive contributor to free cash flow and in 2011, 2012, it led to a decline.

Now that the Honolulu expansion is completed and the Durham York project is well underway, we will see the impact of construction related working capital wind down once construction is complete in Durham York. Recall that the margin on construction revenue is modest as best as compared to the rest of our business, so it’s mostly a payable receivable issue.

As we have done in the past, slide 37 and 38 provide the details using financial year 2012 data of how Covanta consistently generates significant amounts of cash flow from relatively modest earnings.

As I will discuss later, the recent DELCO acquisition is a case in point where depreciation and amortization of the revalued asset after purchase accounting will far exceed cash outlays related to its maintenance going forward.

This is a live case study of why in order to evaluate Covanta property we suggest focusing on adjusted EBITDA and free cash flow and not adjusted EPS. We continue to find this slide useful as we introduced Covanta’s strong free cash flow story to new investors.

Now turning to slide 15, our adjusted EPS is down $0.02 compared with last year, operating income excluding the Hurricane impact was up $0.09 and our stock repurchase program and equity income added another $0.07.

This was more than offset by $0.11 of higher interest expense associated with the debt financing that we completed in the first quarter and the Hurricane impact of $0.04. When I discussed 2013, I will spend some more time on interest expense.

Let’s move to slide 16 to go through our capital return activities for the year. 2012 was another great year for us. In the fourth quarter, we paid out our third quarter cash dividend, and also announced and paid out the fourth quarter cash dividend both of $0.15 per share. The fourth quarter payout was accelerated based on what was at that time an uncertain tax environment.

Going forward, we will revert back to our normal cycle subject to Covanta Board approval we will announce quarterly dividends in the last month of the quarter with a payable date in the first month of the subsequent quarter.

Now our current $0.60 per share annualized dividend works out to about the 3.1% yield based on the recent stock price. As I mentioned in the past, we see this dividend of having room for growth especially as we aim to grow our free cash flow.

During the year, we repurchased $88 million of stock, this reduced our actual share count to 132 million shares at year end, a massive reduction of about 16.7% since we started the buyback program less than three years ago.

Let me spend a minute on why our fourth repurchase was less than recent quarter. In the fourth quarter we bought back $3 million of stock bringing the full year total to $88 million.

During the quarter we also made a big investment of $94 million in cash for the Delaware Valley facility acquisition. We also paid which as you know was a really good growth investment for us. We also paid an extra dividend which we typically would have paid in Q1 of 2013.

From capital allocation and liquidity management point of view as we will show you net-net we have to borrow for this to fund the sum total of capital return activities and growth spending.

Recall our commitment to you is our free cash flow will first we dedicated to high return, growth projects with the rest going to capital return activities. 2012 was a great example of that in action.

Going forward, we remained focus on a growing dividend and the pursuit of high return growth investments, absent growth investments we will continue to buyback stock with our strong free cash flow.

I told you a while ago that we wanted to be book kept on how we used our cash, on slide 17 we have given you a breakdown of how we used the cash that we generated over 2012.

As you can see we returned a very healthy amount of cash to our shareholders $178 million while investing in the future growth of the business. For details on the $125 million of growth spending, please go to, I believe its slide 42 in the appendix.

We are committed to growing the business and we’ll invest to do so. That said, shareholder returns remains an important part of our story and we clearly delivered that again in 2012.

Moving on to slide 18, let’s take a quick look at how our balance sheet evolved in 2012, one of the big changes to the balance sheet in 2012 was a Delaware Valley acquisition. We paid $94 million in cash for -- in the transaction and as a result no longer have lease payments associated with this facility which lowers our plant operating expense.

We also took on $624 million of project debt and received $122 million in restricted funds, leading to a net cost of only $36 million. A portion of the restricted funds will be dedicated to repaying the project debt while the rest will be distributed to us overtime. This will be a nice addition to our free cash flow starting next year then over the subsequent five years.

One other point based on fair market analysis for purchase accounting purposes we recorded about $215 million of increment Delaware Valley property, plant and equipment, which is significantly higher than our purchase price. This will be depreciated over time, negatively impacting our adjusted EPS but not our adjusted EBITDA.

In addition, we will incur projects debt interest expense. Of course, the transaction remains highly accretive over time to our key metrics. Despite all of our growth investment and capital return activities, we haven’t stressed our balance sheet by any means. As you can see, our ratios are strong and we continue to have significant dry powder for potential new uses.

Now in 2012, we did undertake two very successful financings, a great work by Brad and his team. A $1.6 million redo of our major credit facilities in March and the fourth quarter refinance of over $300 million of our tax exempt project debt.

Under topic of new debt, let me walk you through why our interest expense will increase in 2013. On a book basis, it will go up from about $145 million to a forecast of about $162 million at the midpoint of our adjusted EPS guidance range.

First, we took on some additional project debt from the [liquidity] acquisition that I just mentioned. Second, the result of the $1.6 billion refinancing was about a 300 average basis point increase and about $700 million of debt, including about $80 million dollars of net new long-term debt that we raised as part of the transaction.

Not only will we have increased costs associated with this debt, but in 2013 we will have a full year impact from it as well. The non-cash convertible debt related interest expense is up $4 million to as per its accretion schedule.

As you can see some more detail on our debt and exhibit 7 of the press release, the $335 million of corporate tax exempt debt which I just referenced included $315 million of refinanced debt and $20 million of incremental debt. In terms of interest expense, the coupon savings on the refinanced debt was roughly offset by the interest on the incremental debt balance.

In addition, we will continue to utilize modest amounts of our revolver over 2013 to smooth out our cash usage. All as being equal, actual interest expense will vary with the amount of revolver we have outstanding during the year. Hopefully, you found this useful.

Slide 19 summarizes our 2013 guidance ranges. Let’s move over to the waterfalls where I’ll go through the components of how we will achieve this ranges in a bit more detail. Before we do that, a quick word on growth spending.

We’ve always said that the best use of our cash is to growth the business and in 2012, we used $125 million for growth spending, which includes $94 million for the Delaware Valley acquisition. We expect that we’ll have between $75 million and $100 million in growth spending in 2013. This includes some investments in our waste business that we mentioned before such as our Niagara streamline and the initial stages of our investment in the upgraded mission control system at our Essex facility.

It also includes investment in our organic growth initiatives. However, this range does not include investment in any large scale new development projects or any potential acquisitions. We will address those if and when they come to fruition.

We remain prudent investing our capital in long-term projects, and seek robust return thresholds before we move forward. Now, let’s go to the waterfall. First, we aim to grow our adjusted EBITDA by 5% at the midpoint of our $500 million to $330 million range in 2013.

I’m on slide 20 now. As you can see the first $9 million or about 2% of that growth is adjusting for the 2012 impact of Hurricane Sandy. The next $35 million, the midpoint of our adjusted EBITDA range is driven by organic growth as well as other factors.

The majority of this growth will be driven by four things -- special waste, metal volumes, operating efficiencies and the impact of our Delaware Valley acquisition. This growth is expected to be offset by $21 million from a combined impact of the market price on metals versus the average market price in 2012 and the year over reduction in debt service billings, which remains a significant drag at $16 million this year.

Net debt of cost despite contract transitions and commodity price fluctuations, we are intent on growing the business both for earnings and free cash flow. Our track record supports this objective.

Moving on to slide 21, free cash flow is expected to be up 1% at the midpoint of a result of the $14 million growth in adjusted EBITDA at the midpoint and $8 million year-over-year impact of Hurricane Sandy, offset by higher working capital primarily from consumption and increased interest cash interest which I talked about earlier.

Note that our estimate for maintenance CapEx in 2013 is for $80 million to $90 million, so unchanged from 2012. Other than for inflation, we don’t see any significant increases in the foreseeable future. Absent the impact of lumpy working capital movements related to construction, our guidance would have been up year-over-year for free cash flow.

In terms of our 2013 adjusted EPS guidance, which we address on slide 22, we have year-over-year hurricane impact of $0.04 and the benefit of our 2012 share repurchases. Adjusted EPS will always be affected as a result of the increased depreciation from our Delaware Valley purchase and the recent growth spending.

To put it in perspective, 2013 D&A expense is forecast to be between $210 million and $220 million, which was $195 million in 2012. As discussed earlier, we’ll have increased interest expense. From a shareholder point of view, we’ve always focused on adjusted EBITDA and free cash flow as our most important metrics given the nature of our business and financial model and this year is no different.

Now, let’s go to slide 23. Our outlook on taxes remains generally unchanged from 2012. Our federal NOL continues to represent a significant value for our shareholders. We paid $8 million in cash taxes in 2012 versus book taxes of $26 million.

Our outlook for 2013 is an effective tax rate of 42% to 47% and cash taxes to be in the $10 million to $15 million range. Our federal NOL balance was $392 million at year end, which we expect us to last through mid decade for 2015 give or take a year.

Moreover, we have AMT and PTC carry-forwards which should provide a partial tax shield for several year’s past tax. Meaning that, we will be fully tax paying late in the decade. Now it is important to note that the outlook is based on assumptions as we see them right now.

The actual timing of the NOLs utilization will be driven by a whole lot of business actually performs, any federal tax law changes the outcome of the ongoing IRS audit that we have and any tax planning that we may be able to complete over the next few years.

Before I wrap up, I’d like to quickly talk about the first quarter. I’m on slide 29. In terms of adjusted EBITDA, the quarter is looking similar to previous first quarters, lots of maintenance spending. Both this slide and I think in slide 32 in the appendix gives more flavor into the seasonal trends, specifically we expect that adjusted EBITDA year-over-year will be relatively flat in Q1, primary as a result of maintenance outage.

And free cash flow will be significantly down from Q1 of 2012. This is almost all a result of timing around consumption working capital. The receipts from our clients are very lumpy. In fact, the first half of 2013 will be negatively impacted by construction working capital timing. This will reverse in the second half. From the full year, we are looking at another year of strong free cash flow.

Last year, I mentioned earlier we will see the full impact of the 2012 corporate debt financing and the interest and depreciation from the Delaware Valley acquisition. As a result, adjusted EPS will decline significantly in the first year. Again, this shouldn’t be a surprise as I’ve detailed earlier. The interest expense and depreciation increases in all of 2013 compared with 2012.

Finally, I want to echo a couple of points that Tony made in his presentation. Thanks to the little G growth efforts of the team, we expect the base team to continue to grow over the long-term despite the impact of contract transitions. This is of course before any of the options on the business, two of which we’ve already mentioned many times.

Big G growth in terms of development and the impact of increasing energy or metals market pricing and while we execute on all of the above, our robust cash flows will continue to support our capital return activities. Before we take Q&A, I wanted to brag about a couple of recent wins we have had. Tony, my boss, was too modest to mention in his comments.

But in the last quarter, he was honored twice. The first one is for those of you who are operationally inclined. His leadership was acknowledged as one of our handful of CEOs in corporate America with a stellar track record and focus on safety, a recognition given by the Safety and Health Council.

The second one is known to all of you on both the buy and sell side. Tony was chosen as the top alternative energy CEO on institutional investors, all America’s executive team. I want to congratulate Tony on these wins. His leadership and the hardworking folks at Covanta was what made it all happen.

I also want to use the occasion to thank all of you for your support in 2012. We appreciate it greatly and look forward to another exciting year with all of you. On that happy note, let’s take some questions. Keith, please open up the phone line.

Question-and-Answer Session

Operator

(Operator Instructions) And the first question, it comes from Hamzah Mazari from Credit Suisse.

Hamzah Mazari - Credit Suisse

Good morning. Thank you.

Tony Orlando

Good morning, Hamzah. How are you?

Hamzah Mazari - Credit Suisse

Hey, I’m doing well. Thank you. The first question is just on your market energy exposure. You highlighted in detail with contract transitions, how that grows. Could you maybe gives us a sense of how much exposure you’re comfortable with longer term and maybe how your hedging strategy changes as that exposure gets bigger?

Sanjiv Khattri

So Hamzah, the way it works and we obviously have laid out now for you, how things in today’s assumptions will work for the next five years. Over the short-term, we don’t like the volatility. Because of our highly leverage model, any change in revenue directly impacts our bottom line. So over the short-term, we will manage volatility. Over time, we like the exposure. We like the long-term exposure to it. So you see and Tony actually talked about it, in 2013, we have a 1 million units exposed.

We’re already hedging small amounts in ‘14. As the year translates, we will probably hedge more of ‘14 and we will start looking at ‘15. So over time, we will manage the exposure small on the shot and much more in the long term. Makes sense?

Hamzah Mazari - Credit Suisse

Yeah. That makes sense. And just on the dividend, how should we think about your focus and how that should grow over time. And maybe I misunderstood but how much did you borrow to return cash back to shareowners?

Sanjiv Khattri

Well, if you go to slide 17, net-net our debt went up $55 million for the year, very small amount. The point I was trying to make was, we have clear capital return objectives and to the extent that we came across this Delaware facility opportunity. We did not let that compromise our plans. And our plans were to buy a chunk of stock and to have a good dividend.

Any decision on what their future dividend will be is obviously taken by the Board but I think the Board was quite vocal when we changed our dividend last in March of 2012 where they wanted to choose a dividend that has growth potential. So we think our business can afford to have a dividend that can continue to grow. And the way we reflects it is to the extent we have continued successive growth then you will see the stock buyback tapering down but you’ll see a growing dividend. Tony, anything to add?

Tony Orlando

Well, certainly we had a key to dividend growth. It’s growing our free cash flow. And as we said that’s our goal to grow our free cash flow return.

Hamzah Mazari - Credit Suisse

Okay. And just last one from me, on the special waste side, your buy plan has grown a lot there. How should we think about that? Is that just share gain for you or is that just -- is that growth with the market?

Sanjiv Khattri

While you know, it’s sort of really opportunity exploiting, an opportunity that has really come up. Our plants are uniquely positioned in this current sustainability environment and things like a short destruction and sustained zero landfill solutions. We offer a great alternative.

So actually, the overall Pi is growing, number one. Number two, frankly we are doing a much better job of exploiting it. We have a much more organized workforce. So it’s a combination of focusing on it and the Pi growing.

Hamzah Mazari - Credit Suisse

Great. Thank you.

Tony Orlando

Yeah. Just maybe to add a couple of things on that, I mean, remember that special waste is very different than landfill. So it’s not a share gain. We’re bringing waste that will come in at a higher per ton price and displays lower per ton price. And as Sanjiv said, we are out there aggressively marketing our services and we had nice gain this past year about double digits and we expect to continue growing pretty rapidly in that business.

Hamzah Mazari - Credit Suisse

Great. Thanks.

Sanjiv Khattri

Thanks, Hamzah.

Operator

Thank you. And the next question comes from Sanjay Shrestha from Lazard Capital Markets.

Sanjay Shrestha - Lazard Capital Markets

Great. Thank you. Good morning guys and thanks for a lot of detail in this presentation. I had two quick questions.

Sanjiv Khattri

Good morning, Sanjay. Welcome to Covanta.

Sanjay Shrestha - Lazard Capital Markets

Thank you. Two quick question guys, something I would like you guys to, sort of, talk about and give us some more detail. When you talk about the Green-field opportunity, right, what’s really available out there and what are the key criterias you guys look for and is this something that could happen in a year or two or is it really more of a long-term opportunity for you guys.

Tony Orlando

Well, I think it’s fair to say the Green-field developments are long-term opportunities. That’s the nature of the business but does take a long time to develop these. Of course, we have a couple that we’ve been working on for many years. As we said, there is really nothing new to update on those right now but those are relatively near-term, let’s say, if we get some good news on those.

But the other, as you know, we mention CLEERGAS as a potential. Those projects should take a long time to develop but we are -- we are working on a number of opportunities but they’re still in the very early stages.

Sanjay Shrestha - Lazard Capital Markets

Okay. Fair enough. Now, Tony, I think you guys talked about how on a long-term basis you sort of plan to grow free cash flow with a small G rather than a big G of growth, right. I’m quite candid it feels like somewhat underappreciated given the free cash flow yield. So you do talk about ways to get there but one of my question was can you go into some more detail on that point, right. How do we accomplish that post the world there’s no real NOL that you can actually take advantage of things like that? Can you go through that in some more detail for us?

Tony Orlando

Yeah. Sure. I think, it is pretty straight forward. I think again Sanjiv described the last couple of years looking back. Working capital has been lumpy because of our construction. We actually got the benefit a couple of years ago but that caused a decline. We’re kind of now at a point where we expect working capital generally to be at a level number.

We’ve also recapitalized balance sheet. So we’re looking really at our interest to be at a pretty steady level. So what you have left is, in terms of, big drivers on free cash flow will be our adjusted EBITDA and we converge dramatic manner of our adjusted EBITDA into cash because we have a relatively modest amount of maintenance capital spending.

So we’re looking at that EBITDA growth. We’re translating into cash and more than offsetting the increase that we’re going to see in cash taxes because we all have increased cash taxes going forward.

Sanjay Shrestha - Lazard Capital Markets

Okay. Okay. Fair enough.

Tony Orlando

Does that makes sense?

Sanjay Shrestha - Lazard Capital Markets

That makes sense. That’s all I had guys. Thank you so much.

Sanjiv Khattri

Thanks, Sanjay.

Operator

Thank you. And the next question comes from Gregg Orill from Barclays.

Gregg Orill - Barclays

Hi. Couple more questions on free cash flow growth. Just regarding the…

Sanjiv Khattri

Good morning.

Gregg Orill - Barclays

Good morning.

Tony Orlando

Good morning, Gregg.

Gregg Orill - Barclays

…the cash taxes, can you talk about the benefits from PTC use and I guess, at the state level, is there a way to quantify this benefits that can shield your taxes?

Sanjiv Khattri

While, yeah, I did not give specific numbers. I think what we sort of said was that to the extent that we had none of those, our taxes would shoot up to 35%. Once the NOL expires and we are thinking the way we would utilize the AMT and then small amount of PTCs, we could push it back by two or three years. Obviously, we would still be paying a chunk of tax at that time. So higher than the amount I have -- we have been historically paying.

When we are -- as we always do, Gregg, every year, we’ll give you the outlook for the next year. But in terms of modeling, you should think about post mid-decade which is 2015 give or take, the amount will start going up a bit. And obviously, the caveat is what I brought, took up on the call that obviously, that is driven by certain assumptions at this time.

Tony Orlando

Yeah. And again, just to put a fine point on that, I think as Sanjiv said, when the NOLs do expire, we don’t expect to have a big spike up in cash taxes. It’s going to phase in over a couple of years because of those PTCs and other tax assets that we have.

Gregg Orill - Barclays

Okay. And then in the adjusted EBITDA guidance slide, what are the elements that was called out was operating efficiencies. What is left to do there and can you quantify that?

Tony Orlando

Yeah. I think they looked at it. It’s a never-ending process, certainly for us and I would imagine for most businesses. But it is not an insignificant point in terms of our overall organic growth. I mean, we got the revenue side that we talked frequently about in our waste growth and special waste and metals growth. The other big leg of that stool for us really is driving operational efficiencies and our team has done a terrific job there.

We’ve really quite frankly, we’ve exceeded what our expectations were which helped us offset little bit behind where we wanted to be on the metals. And that’s the process that is continuous. We’re going to keep looking for operational efficiencies and whether that’s investing in new equipments that allows our plants to run more efficiently or just basic blocking and tackling in terms of internal processes. So that’s never ending.

Sanjiv Khattri

We have a brand new procurement team, Gregg and they’ve been really making a lot of effect in terms of looking up the global sourcing and some very smart things being done by the procurement team. So, Tony pointed out, he is pretty ruthless about cost. So I see some upside there.

Gregg Orill - Barclays

Okay. Thanks. Congratulations.

Sanjiv Khattri

Thanks, Gregg. See you soon.

Operator

And the next question comes from Michael Hoffman from Wunderlich Securites.

Michael Hoffman - Wunderlich Securites

Thank you for taking the call. And Sanjiv, I hope you’re feeling better.

Sanjiv Khattri

I’m definitely feeling better and I’m waiting for your thank you on the debt service outlook, we gave it to you finally.

Michael Hoffman - Wunderlich Securites

Well, thank you so much. I do appreciate it and also your participation in our conference coming up in May. I have a question. I’d like to tie together couple of the first two questions. And I think Tony your review giving a long view, I just want to sort of talk through a pattern I’m seeing and see it if I’ve got the right vision on this?

As you frame the tip fee outlook over more several years and contracts are coming off, so ebbing and flowing there and the same thing on your electricity team sales. Pattern I’m picking up is and we’re facing in tip fees sort of a couple of years of a dip, flat, couple of years have been up in electricity because you picked up more megawatt hours even though you have lower rates probably trending up for three to four of those years and it flattens out.

And those two kind of offset each other and then the opportunity to grow is continue to expand your special waste, continue to grow volumes in the metals. And that’s the topline and that kind of gives you a couple of points of top line and then free cash in EBITDA gets driven by what was just referred to as ongoing operational efficiencies, just tweaking the screw little tighter every year and squeezing more out of the business. If I frame that correctly so, underlying, I got a very good visibility on very durable sort of range of free cash for next five years.

Tony Orlando

Yeah. We certainly do feel very good about the durability and visibility of our free cash flow and maybe just try to articulate it the way I think about it. And we’ve got the service fee transitions that we talked about right and there are things that work for us with the energy being the biggest most visible piece to that, the debt service being the biggest and most visible piece working against us.

And what we tried to lay out for you is in total, those service fee transitions, they’re causing a little bit of headwinds. They have been, they will this year, they will next year and then they kind of go to neutral in ‘15 and positive for us in 2016. So that’s big picture of service fee transitions.

Then the other two big dynamics we have is really organic growth, which of course is driving positive improvements. I think we’ve been doing a terrific job on that. And then kind of offsetting that to some degree is the above market energy and waste contracts ruling off. And when I’m talking about waste contracts here, I’m really focused on what we would consider tip fee contracts.

Relatively modest in terms of any change in waste contracts and those kind of phase in over the course over the next several years.

Michael Hoffman - Wunderlich Securites

Okay. And then some housekeeping, your 340 ferrous and your 25 non-ferrous run rate that compares to the end of the year 309 and 1407, that’s the right comparison, correct.

Tony Orlando

Yeah. Exactly.

Michael Hoffman - Wunderlich Securites

Okay. And we should, for our purposes, is it reasonable so we can call that a smooth process or do you have visibility saying no really, there is some probably starts momentum at the time. How do I think about that?

Tony Orlando

We’re going to get them in as fast as we can. But again, there is a lot of factors with each of these. And given the fact that we turned out to be a little bit aggressive perhaps would be a little bit more cautious this year. But there is permitting, there is a lot of things that have to happen. So we said look we’re going to get these things in by the end of the year, that gives you a fourth quarter run rate to look forward at 2014 and we’re going to get them in as fast as we can.

Look, as I mentioned earlier, the 2014 is not going to be an easy year. We have debt service that we identified as $20 million headwind and we also had some above market energy contracts that will influence 2014. And we’re planning for that because our goal is to grow, is to grow over year. And one of the reasons we’ve stepped up our organic growth investment this year from, I think, it was around $30 million last year that we’re targeting $75 million to $100 million this year is to get that capital invested this year, to get the benefit in 2014.

Michael Hoffman - Wunderlich Securites

Okay. Last question, based on the current use of the revolver in 1Q, what should we assume the actual interest expense is going to be for 1Q?

Sanjiv Khattri

Again, we don’t want to give specifics as we pointed out, it depends. We gave you the expense for the whole year. And I don’t know, Brad, anything, it’s lumpy but any comments on revolver usage.

Brad Helgeson

Certainly, the revolver balance will be determined of interest expense over the course of the year. The interest expense as we see here today and in the context of the full-year number that Sanjiv mentioned in the prepared remarks should be pretty consistent over the course of the year. So plus or minus take 25% of that $160 million plus or minus figure.

Sanjiv Khattri

And then you obviously know our free cash flow, Michael and to the extent that that’s lumpy, that could drive some of the revolver usage to the extent that we want to smooth out our uses.

Michael Hoffman - Wunderlich Securites

Right. Understand that. Trying to understand what -- how low 1Q EPS is going to look.

Sanjiv Khattri

Okay.

Michael Hoffman - Wunderlich Securites

Thank you.

Sanjiv Khattri

Thank you.

Tony Orlando

Thank you.

Operator

Thank you. The next question comes from Al Kaschalk from Wedbush Securities.

Al Kaschalk - Wedbush Securities

Good morning. Can you hear me?

Tony Orlando

Good morning, Al.

Sanjiv Khattri

Good morning, Al. Bright and early for you. Thank you for the call.

Al Kaschalk - Wedbush Securities

You’re welcome. Just one clarification on the CapEx for dollars invested, they make you to sit $75 million to $100 million. Is that the right number or did I pick up something personal here?

Sanjiv Khattri

That’s exactly right. Our growth spending is $75 million to $100 million for the year. That’s our outlook. We will update that outlook as appropriate over the year. Just to put it in perspective for you, last year, the equivalent number for that was around $50 million. We actually only ended up spending $31 million and the main reason for that was some of our battle projects got delayed.

So that is just apples-to-apples, that’s how you should look at it and we will track it. And the reason it’s much higher I just want to repeat. Some of it is our organic growth initiatives that’s obviously year-over-year similar, but it’s also some of the upgrades we are doing at the Niagara plant and we are starting to spend money on the Essex plant to build the new bag house.

Al Kaschalk - Wedbush Securities

Okay. All right. Secondly, while I maybe pushing a little bit but Tony, I appreciate the longer-term growth prospects and your comments or commentary that there is nothing to update. But can you talk about maybe some of the puts and takes on some of the larger growth opportunities and any developments there that would get you less constructive or more constructive?

And how you think about the plan here for the ‘13 and ‘14, because clearly the positioning of the balance sheet and the financial transactions you undertook would suggest you are -- you will probably be making some investments, so I’m just trying to find out where those are, little bit particularly in the ag here? So to the extent, you can comment or provide some additional color on these larger projects and any developments or macro things that you are more excited or less excited about would be helpful?

Tony Orlando

Well, again, we are making meaningful investment in the growth initiatives and certainly that’s an important piece of the puzzle. With respect to the bigger items, it’s a decision that has to be made by our clients with respect to the Merseyside facility in the U.K. We expect the decision to be any moment but we can’t say. It’s their decision. All we can do is wait and frankly focus on making sure that our spend in that regard is controlled.

We’ve also -- we are working on the Dublin project but there are still a number of steps to go there, so no news there as well. So, again, we are looking to pursue these projects because we think we can add some real significant value to shareholders if we are successful. But we are also doing in a way that I think is focused and controlling the costs.

Sanjiv Khattri

And the number and just one clarification for the benefit of everybody on the call that Tony described what are call options on the business. The overall growth outlook that we took you through was for the base business before any of these options had.

Al Kaschalk - Wedbush Securities

Right. I guess what I’m trying to say are the main inquiries and asking it. It’s as if your internal plans generally exclude this more so than maybe they’ve had in the past.

Sanjiv Khattri

Not true, Al. I’m sorry to cut you off but not true. We clearly -- our focus on development is very focused. We’ve talked last year but that being in the mid-teen IRRs. Those are some of our objectives for those projects, but they are tough to get and we’ve done a horrible job of forecasting when we’ll get them, which is why we wanted to talk about the base business.

And then build on it and you guys could handicap what you wanted to have in terms of prices and you could handicap what you want to do about development. And then obviously the two longer-term upside that Tony talked about, CLEERGAS and federal policy.

Al Kaschalk - Wedbush Securities

Thank you.

Sanjiv Khattri

Thanks, Al.

Operator

Thank you. Next question comes from Stefan Neely from Avondale Partners.

Stefan Neely - Avondale Partners

Good morning, guys.

Tony Orlando

Good morning.

Sanjiv Khattri

Welcome, Stefan. You are doing the heavy duty for Dan. Welcome.

Stefan Neely - Avondale Partners

Thank you. Quick question on capital allocation, I’m wondering if you could maybe frame that out for us a little bit as far as maybe buyback and dividend increases.

Sanjiv Khattri

Well, as I said these are decisions made by the Board. I think our track record speaks for itself. I think we’ve turned over $800 million of capital over the last two and a half, three years since we started the plan and I think the Board is focused on a growing dividend that will be a decision we should hear in the next several weeks. And to the extent that we’ll continue to have residual free cash flow, we will invest to buyback stock.

And for that sort of it, I think the way you should be looking from a modeling point of view, what are the growth opportunities the company has, what are those good growth opportunities if so, we’ll invest in them first. We have a growing dividend, which is important to us. We’ll invest in that and then if there is any money left, we’ll use it to buyback stock.

Stefan Neely - Avondale Partners

Okay. Great. And kind of on the buybacks -- I noticed in the release that you had an average share price of about $16 and with the stock now at $19.5. Does that kind of -- I don’t know if it changes your view on the buyback but does that kind of affect your decisions when it comes to quarterly buybacks?

Sanjiv Khattri

Yeah and no. I think the bigger issue that drives our decision is how much cash flow we have. We have been averaging it in. When we were buying it at $16 folks were asking us why didn’t you buy when it was $14 and so it really depends. But the Board sets some parameters, we look at our cash flow and buy it and last year was a good case in point. So, obviously we look at everything but there is no yeah and no target that we have.

Stefan Neely - Avondale Partners

Okay. Okay. Great. And on the 2014 outlook, you kind of gave us the service pass through hit. Can you maybe quantify the contract headwinds and also maybe, do we expect to see EBITDA growth from ‘12 to ‘13 as a result or what are you guys thinking on that?

Tony Orlando

Well, again, we laid out kind of specifically what the debt service is. And generally those service fee transitions are a headwind in 2014 and then we also have energy contract headwinds. But we are not going to layout those specific numbers because I think it’s suffice it to say, 2014 is not going to be easy but it’s our goal to grow and to grow over year.

Stefan Neely - Avondale Partners

Okay. Great. That’s all I have. Thanks, guys.

Sanjiv Khattri

Thanks, Stefan.

Operator

Thank you. The next question comes from Chris Kovacks with Baird.

Chris Kovacks - Baird

Hi, guys. Thanks for taking my question.

Tony Orlando

Hi, Chris.

Chris Kovacks - Baird

Hi. Kind of following up on a couple of the previous questions around capital allocation and maybe the European projects, are there other growth opportunities that you maybe have on the radar and that you might invest more aggressively if these things don’t happen or would you consider any cash flow that may you would have reserved for the European projects to maybe -- I think you would immediately think about as capital redistribution in shareholders within their buyback?

Tony Orlando

We definitely have other growth opportunities and I think what we have with -- quite frankly with Dublin and Merseyside is a very public process because we are serving public clients. And so those get a lot of attention and of course they are very big, so they get a lot of attention.

But we have a number of other growth opportunities and some of those we hope will come to fruition. And I think as Sanjiv said a number of times, we are disciplined in our growth process. We want to make sure that the investment is both strategic and it has a good return. So we make sure there is absolutely other growth investment opportunities above and beyond the big ones that we talk a lot about and above and beyond the organic growth.

Chris Kovacks - Baird

Okay. And just as a quick follow-up related to that. As reaching more of these contract transitions from service fee to intuitive fee and I was wondering if you get a great percentage in the metals. Should we think about you kind of having and maybe not as aggressive as in the last two years but a similarly strong pension for investing in recycled metals equipment I guess and in 2014 plus?

Tony Orlando

Well, I think we will still have some metals projects in 2014. I will say that we are going after pretty aggressively where we think it makes sense now. So we won’t be tapped out with investments in 2013, but I think there was some additional upside beyond that, but I think that will probably picking out in 2013 in terms our investments.

The one possible additional opportunity that I did mentioned earlier is the joint venture that we have with TARTECH. We believe we’re going to start to make our first investment we’re hopeful anyway to get that to the point that we are ready to investment this year. And so we think that maybe that will start to pick up with some additional metal recovery beyond what we are doing directly at the facilities.

Chris Kovacks - Baird

Great. Thank you, guys.

Tony Orlando

Thanks Chris.

Operator

Thank you. And next question comes from Barbara Noverini from Morningstar.

Barbara Noverini - Morningstar

Hello. Good morning.

Tony Orlando

Good morning, Barbara. Welcome.

Tom Bucks

Hi.

Barbara Noverini - Morningstar

Thanks. So with your estimated metal tonnage 340,000 for 2013, that implies a 10% increase from 2012 in ferrous metal. So is this growth primarily driven by the instillation of this new systems? I guess, another words, does this technology enable you to recover 10% more metal than before is that number too low, too high?

Tony Orlando

No. That is the correct conclusion. Roughly 10%, it is gain that’s a year end number which would be at 214,000 run rate. And, but I would say, it not so much to this 10% across the board as it is targeted at specific facilities where we think we’ve got an opportunity to deploy new technology to improve.

I would also point out that the bigger revenue driver is actual the non-ferrous than it is the ferrous. So while there, 30,000 ton pick up in the ferrous, the prices of ferrous are lower than the non-ferrous and our non-ferrous is going roughly from 15,000 to 25,000 is our target.

So that’s a significant increase in percentage driven by both new systems, as well as what we talked about we installed the first of its kind at our Fairfax facility last year to go up to much smaller pieces of non-ferrous metal that we can now recover and sale. So that’s actually going to be the big revenue drivers in non-ferrous recovery.

Sanjiv Khattri

And then one quick, not to sound geeky here, I did want to clarify that the number that Tony took you through was the run rate at the end of the year.

Barbara Noverini - Morningstar

Got it. Okay.

Sanjiv Khattri

So, we will grow into that rather than achieve it for the full year.

Barbara Noverini - Morningstar

Got you. Okay. Great. Thank you very much.

Tony Orlando

Thanks, Barbara.

Operator

Thank you. And the next question comes from Carter Driscoll from Ascendiant Capital Markets.

Carter Driscoll - Ascendiant Capital Markets

Good morning, gentlemen. Thanks for taking my question. I do want to echo, yeah, gentlemen, thank you for the additional level of details, sound it very helpful. A lot of my questions have been answered. But I want to step back one other comments you made in the prepared remarks and just talk about the potential of some type of climate change build, given the focus has been on some challenging near-term headwinds for 2013 and 2014.

What the potential you see and I realize this is very theoretical but what potential you see for whether we introduce the carbon tax or whether its comes in some other form and how that may or may not impact the domestic market, obviously there has been a lot of challenges to getting new facilities build, some of which is clearly depend on the concentration of tonnage? But maybe opening up the opportunity to other markets where economics might not work, say the Midwest if you have, say, let say, carbon tax?

And how you think about that, I realize you are not planning for it, but if you can just give me a thoughts about what you’re monitoring, because obviously you have a team in place that monitors regulatory developments and how do you foresee that playing out over the next several years if it all?

Tony Orlando

Yeah. I’ll take a couple of lines of thought on that. Two ways President could try to push forward with his desire to address climate change, right. One is legislatively, clearly that’s one that would be subject to significant debate, whether that through either renewable energy policy or carbon tax or cap and trade, all those likely to be fairly controversial.

I can say that when this got closed couple of years back in his first term. We were treated very favorable as an industry, would have gotten renewable energy credits under the policies that had gotten past on the outside but never made it through the senate side.

So, given all of the issues that they’ve got to deal with in Washington on the fiscal side and quite frankly with gun control and immigration and everything else, it’s probably a heavy lift to get something done legislatively.

I think what’s probably to bigger wild card is what the EPA might do? How might the EPA try to regulate, obviously they’ve kind of regulated carbon on new coal plants, they haven’t yet done anything on existing plants. But if they were to do something that I believe would, likely increase the price of electricity generally.

Again, kind of the way we’re treated in the U.K. for example, there is a carbon tax in the U.K. I mean it applies for fossil fuels. But there is no carbon tax on energy from waste because we have climate change benefit. So that type of policy were to be an active here that would obviously be great for us both in terms of the existing plants, as well as creating new opportunities for growth.

Carter Driscoll - Ascendiant Capital Markets

That’s very helpful. I kind of agree with you that, probably the initial benefit might be higher energy prices from a practical perspective rather than to legislative forefront. I appreciate your thoughts on that.

Sanjiv Khattri

Thanks, Carter. I hope you learn on your feet. Thanks.

Operator

Thank you. And there are no more questions at present time. So I’d like to turn the call back over to Mr. Orlando for any closing comments.

Tony Orlando

Again, thank you, everybody. We are looking forward to 2013. We’ve got a lot of an issues going on and we are optimistic about where we’re going this year and beyond. So look forward to talking to you in the first quarter.

Operator

Thank you. This concludes today’s teleconference. You now disconnect your phone lines. Thank you for attending and have a nice day.

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