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Executives

Alan Katz - Vice President of Investor Relations

Anthony J. Orlando - Chief Executive Officer, President, Director, Member of Technology Committee and Member of Public Policy Committee

Sanjiv Khattri - Chief Financial Officer and Executive Vice President

Analysts

Daniel J. Mannes - Avondale Partners, LLC, Research Division

Hamzah Mazari - Crédit Suisse AG, Research Division

Gregg Orrill - Barclays Capital, Research Division

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Barbara Noverini - Morningstar Inc., Research Division

Carter W. Driscoll - Ascendiant Capital Markets LLC, Research Division

Covanta Holding (CVA) Q3 2013 Earnings Call October 24, 2013 10:00 AM ET

Operator

Good morning, everyone, and welcome to the Covanta Holding Corporation's Third Quarter 2013 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 and use the replay conference ID number of 10034137. The webcast will 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 Mr. Alan Katz, Covanta's Vice President of Investor Relations. Mr. Katz, please go ahead.

Alan Katz

Thank you, Amy, and good morning. Welcome to Covanta's Third Quarter 2013 Conference Call. Some of you have asked why we moved our call to 10:00 a.m. today. One of the other waste companies announced that they were planning to hold their call at 8:30 a.m. on this date, our usual time, and we thought that it would be easier for those folks who follow both companies if we hold the call at a later time. We should be back to our 8:30 a.m. time next quarter.

Moving on. We have a lot of new information, including expanded disclosures and new guidance in our web deck. Sanjiv, Clare, and I are available for calls to discuss any of these new info over the coming days and weeks.

Joining me 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 will provide an operational and business update, 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.

Before I get into the Safe Harbor, I'd like to remind everyone that we hold regular plant tours every quarter. The next one will be in February. You can sign up for these on the Covanta IR website or by e-mailing ir@covantaenergy.com.

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 such differences can be found in the company's reports and registration statements filed with the SEC.

The content of this conference call contains time-sensitive information that is only accurate as of the date of this live broadcast, October 24, 2013. We do not assume any obligation to update our forward-looking information, unless required by law. Any redistribution, retransmission or rebroadcast of this call, in any form, without the expressed written consent of Covanta is prohibited.

The information presented includes non-GAAP financial measures. Reconciliation to the most directly comparable GAAP measure and management's reason for presenting such information is set forth in the press release that was issued last night, as well as in the slides posted on our website. Because these measures are not calculated in accordance with U.S. GAAP, they should not be considered in isolation from our financial statements, prepared in accordance with 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'd like to turn our call over to our President and CEO, Tony Orlando. Tony?

Anthony J. Orlando

Thanks, Alan, and good morning, everyone. For those of you using the web deck, please turn to Slide 3. Our third quarter results came in better than last year but slightly below our expectations. Based on our year-to-date results and our outlook for the rest of the year, we've lowered our guidance metrics. Three primary reasons have developed within the last few months: first, energy sales were lower than expected not because of our production but because of a couple of unusual circumstances related to customers' inability to take our steam and electricity; second, unscheduled downtime is costing us more than we anticipated; and third, our organic growth, while still quite good, is a little behind the targets we were shooting for. Lowering guidance is not something that I take lightly nor does anybody on our team. It's frustrating because we're running hard to grow. Notwithstanding continued high boiler availability and solid returns on our organic growth investments, we're having a hard time overcoming the above-market contract transitions, including the loss of debt service billings.

But we did accomplish 2 things this quarter that will definitely help us grow in the future. First, we acquired a 1,050-ton-per-day Energy-from-Waste facility in Camden, New Jersey, for $49 million. This transaction was immediately accretive, and we'll see the full benefit next year. Second, we signed a 20-year contract with New York City to transport and dispose of approximately 800,000 tons of waste per year from 2 marine transfer stations. I'll go through the details of this shortly, but suffice it to say, this is an important contract which will begin adding value in 2015.

Now let's turn to the business outlook. We'll start with Waste on Slide 4. Our view of the waste market has not changed. Our special waste business is on pace to achieve double-digit revenue growth in 2013, but we've reduced our expectations a bit. I want to emphasize that I remain bullish on the long-term growth runway for our special waste business. We also secured additional contracted waste by signing agreements with several municipalities in Connecticut and Massachusetts for our bundled service offering. In addition, we signed a 5-year extension of our service fee contract in Marion County, Oregon. We'll continue operating this plant on similar terms.

Looking beyond this year, I'm confident we'll continue our strong track record of renewing contracts. Furthermore, we'll benefit from contract escalation, and we're targeting continued strong growth in our special waste revenue. However, 2014 will be another challenging year for waste and service revenue primarily due to the $20 million reduction in debt service billing. Having said that, I'm glad to point out that the debt service revenue reductions finally moderate in 2015, and this will almost be completely gone by 2016. We've previously provided a long-term schedule of debt service billings for those of you interested in looking this far out. In addition to renewing contracts, I'm pleased that we signed an important new 20-year agreement with New York City.

Let's turn to Slide 5 to cover this contract. It's the largest single contract in the company's history, with the city estimating it could be $2.8 billion in revenue over the life of the contract. This contract is different from our typical waste agreement. We are providing the logistics to move the waste from 2 city-owned marine transfer stations or MTSs to our facilities in Niagara Falls and Delaware Valley. The city has already built the Queens MTS and is expected to complete construction on the Manhattan MTS in 2016. The Queens MTS will account for approximately 600,000 of the 800,000 tons of waste that we'll dispose of annually.

The city will run the front half of the MTS, where they will load waste into sealed containers. Then we'll load the containers onto barges, transport them to the New York container terminal in Staten Island. At this point, the containers will be put onto railcars for delivery to our facilities. This contract requires us to make a significant total initial investment of approximately $140 million. The vast majority of this is directly related to the New York City contract. $110 million will be to purchase the barges, railcars, containers and other intermodal equipment. The equipment related to the Queens MTS is already on order. The remaining equipment for the Manhattan MTS will be ordered when the city gives us the notice to proceed for that phase of the contract. We plan to issue tax-exempt bonds to finance this equipment purchase.

We'll also invest about $30 million to build a railhead at our Niagara facility and complete some facility improvements at the Delaware Valley facility. These investments will enhance the long-term value of these assets, in addition to benefiting the New York City contract. The city will pay us a set capital charge, plus a variable service fee based on the number of containers we handle.

One point to remember, this waste will displace lower-priced spot waste revenue. We plan to start taking delivery of waste and generating revenue under this contract early in 2015, which will provide a nice boost, with additional benefit when the Manhattan MTS comes online. And adding a 20-year contract for that much revenue provides us with a great deal of stability.

Moving on to our energy portfolio. Please turn to Slide 6. Natural gas and electricity markets are in line with our last earnings call. Full year average natural gas is still forecasted to be about $3.70, and we've reflected the current forward curves in our revised guidance. We've updated our 2013 energy generation outlook to add the Canada facility output and to reflect an unanticipated reduction in demand. I noted this earlier as one of the reasons we've revised guidance, so let me spend some time on this.

At several locations, we sell steam, which is more efficient and profitable than selling electricity. You may recall, at one of our facilities, we built a steam line to a new customer, who invested in a large state-of-the-art cardboard recycling facility. To ensure we get a return on our investment, the customer agreed to a minimum take-or-pay obligation. But that obligation does not begin until their facility is running in steady-state operation, which is expected in the middle of next year. During the startup period, they are buying steam, but at a much lower demand than we or they had anticipated. The lower steam demand cost us several million dollars.

That said, we expect they will do everything in their power to ramp up to full production as quickly as possible. After the take-or-pay obligation begins, we'll have more visibility to steam volumes. We also had another steam customer whose demand was a bit below expectations. And at another facility, the utility that buys our electricity had to conduct unplanned maintenance on their grid, and to do so, they had to take us offline for a period of time.

Looking further down the road. Our contracted energy revenue is sold with an average price in the mid-$70 per megawatt hour, which is above current market. As those contracts end, we'll feel the impact unless the market improves. As you may recall, at the beginning of this year, we noted that we have several above-market contracts transitioning in 2014. Based on our current forecast, we still expect this to be case. The adverse impact next year will probably be on the order of $10 million to $15 million.

Let's move on to metals on Slide 7. Net metal revenue was up $2 million year-over-year, driven by an increase in recovery rates related to the new system installations. We've continued to make good progress on this front. Year-over-year, our net ferrous tons increased by 9%, while our non-ferrous tons increased by 41%. We must still complete several projects to achieve the year-end target run rate we set for ourselves, which was approximately 340,000 tons of ferrous and 25,000 tons of non-ferrous. We have a good shot to get there by year-end. However, completion was delayed on several large systems so the pickup in volume will be a little bit less than we were hoping for in the second half of this year.

Regardless of the startup timing, these are excellent projects with nice returns. Overall, the improvements we've made in recycled metal recovery have helped offset many of the challenges that we're facing on other fronts. The average HMS price so far this year has been $3.40, slightly below our original expectation. For our guidance, we've assumed it stays there. Looking ahead to next year, we'll see the full benefit of all the systems we've installed this year, plus we have a few more systems to install next year, although the pace of capital investment in metal recovery systems at our facilities is slowing.

Now let's turn to the outlook on Slide 8. I've already covered the 2013 guidance generally, and Sanjiv will review this in further detail. But I want to step back and review where we are and what it means for the business going forward. Big picture, 2 things are new. First, we expect to see a moderate increase in our maintenance expense. In addition, our organic growth, while still quite good, is lower than we had hoped. This is not caused by any one thing, it's a lot of small things, which total about $10 million below our organic growth target for this year. And that means we'll be starting next year with a slightly lower base.

The increase in maintenance is not a fundamental shift. We always maintain our facilities to a very high standard, and the vast majority of our maintenance activity is conducted during scheduled events. But unscheduled maintenance downtime does occur. That's the nature of operating large complex power plants. The primary cause of unscheduled downtime is the boiler. That's why we focus so much attention on it. And as a result, our boiler integrity is excellent, as evidenced by our 92% availability. But as our facilities age, we're facing more frequent challenges with other major components, such as turbine generators and air cool condensers. And therefore, we're proactively increasing our scheduled maintenance to address these other areas. As I said, doing so will moderately increase run rate maintenance expense and capital.

Now let me turn to the other factors affecting 2014 outlook. As we've mentioned many times before, we'll be experiencing several contract transitions that work against us. The 2 big ones are the $20 million reduction in debt service and the $10 million to $15 million reduction related to energy contract transitions. We also had several onetime benefits this year that will not repeat next year. And finally, on the list of 2014 challenges, we expect lower construction working capital, but I don't view this as meaningful because it will flip around and benefit 2015. Sanjiv will discuss this further.

Let me turn to what we're doing to offset these challenges. We continue to push hard on all of our organic growth initiatives, including metal revenue, special waste, operating efficiencies, plus we'll have the full year benefit of the Camden acquisition. Furthermore, we'll be reducing our G&A spend. This benefit is primarily related to European business development, but we'll also be tightening our belt across the board. Looking at 2015, we're well positioned to achieve growth given the benefit we'll see from the New York City contract. And as I mentioned earlier, the reduction in debt service billings begins to moderate in 2015.

As we look to the future, we remain focused on these 3 things: providing high-quality service for our clients and further cementing our relationships with contract renewals; making smart, long-term focused investments in the business to preserve our assets and make them more efficient while positioning us to grow; and finally, allocating capital to achieve the highest return to our shareholders. Sticking to these basics will benefit all of our stakeholders in the long run.

Now I'll turn it over to Sanjiv.

Sanjiv Khattri

Thanks, Tony. Good morning, everybody, and good afternoon to those of you calling in from Europe. While the fact that we are lowering guidance on this call is disappointing news, our goal is to be transparent in terms of the gives and takes that are impacting our near-term financial performance. We hope that this will allow you to assess how well we are coping with the near-term challenges while remaining focused on running the business for long-term shareholder value.

Before jumping on to the numbers, let's take care of some normal housekeeping. First, I wanted to remind everyone that we have our detailed P&L on Slide 20, as well as the usual non-GAAP reconciliations in the appendix. In addition, slides 25 and 26 provide a free cash flow walk, showing how you get from our booked earnings to our free cash flow. We are happy to take any questions on any of these, of course.

Now on to the main deck. Slide 10 lays our Q3 2013 financial highlights. Tony went through these results, so I'll just say that this quarter came in a bit lower than expected on adjusted EBITDA, but year-over-year, it was a solid quarter, as you can see from the waterfalls. Free cash flow was much higher because we got the construction working capital payment that I had mentioned last quarter. If you recall, I noted that it would either be a Q3 or Q4 inflow. As discussed earlier, all of our key metrics are up year-over-year. We also completed the acquisition of the Camden Energy-from-Waste facility this quarter. This had a very modest impact in Q3 but is a nice long-term addition to our portfolio.

Before I go on, I want to flag 2 noncash write-downs totaling $12 million pretax that we had this quarter. The first is a write-down of $9 million related to our Wallingford facility in Connecticut. This facility had an attractive power purchase agreement that ended a couple of years ago, and our updated outlook for the facility required us to write it down. We continue to look at various options to enhance its outlook. The second is a $3 million write-down related to our unconsolidated equity investment in one of our biomass facilities. We are a 55% owner of this plant. We don't operate it. Therefore, we don't control things like contract renewals or cost-saving opportunities. At the current bark spread, the facility has just not been profitable. As such, we decided to write-down the asset as we continue to look for ways to optimize its value.

Before I discuss the quarter in detail, let's spend a few minutes on the puts and takes that resulted in our lowering the 2013 guidance ranges. I'm on Slide 11. As I mentioned, our 2013 guidance ranges are now $480 million to $495 million for adjusted EBITDA and $220 million to $240 million for free cash flow. Adjusted EPS also moved down to $0.33 a share to $0.43 a share. Tony already addressed the 3 reasons why we are down versus our last update in July.

Let me just quickly repeat those reasons: first, unscheduled downtime continued to negatively impact our results; second, our full year energy sales will come in lower than expected not because of our production but because of some unusual circumstances leading to the inability of a few customers to take our steam and electricity; and third, our organic growth initiatives, while still creating value and helping us to offset the impact of contract transitions, are a little behind the 2013 targets that we were shooting for.

While this explains changes since our last earnings call, I also wanted to take a step back and discuss briefly the overall changes from when we initially gave guidance to you in February. Looking at the changes since the start of the year, we had the $7 million net full year benefit that we gained from the Q2 buyout associated with our above-market PPA. This benefit has now been offset by a couple of customers' inability to take our steam and electricity that I just noted.

This leaves 2 other factors: organic growth and unscheduled downtime. At the beginning of the year, we said we were targeting a $20 million to 50 million full year benefit from organic growth. We now expect to be near the bottom of that range, closer to $20 million to $30 million now. Midpoint to midpoint, that's a $10 million decline. Tony already covered some of the reasons for this so I won't repeat them. But despite this, the organic growth initiatives continue to add value to the bottom line.

This updated view on organic growth alone would have put us near the bottom end of the range. Then on top of that, we had the impact from our unscheduled outages, which we estimate for the full year to be about $15 million. This includes $3 million of unscheduled outages in Q3 on top of what we had in the first half of the year. Remember, this impact results from both lost revenues and increased maintenance costs. Note that we lay out maintenance expense trends for your reference in Exhibit 10B of the press release.

A side comment on maintenance CapEx, we are still on track to be within our original maintenance CapEx guidance ranges of $80 million to $90 million for 2013. Adding everything together, we revised 2013 adjusted EBITDA guidance to $480 million to $495 million. We lowered our free cash flow guidance based on the adjusted EBITDA impact, as well as an additional $10 million in negative working capital in Q4 relating to the usual ebbs and flows of the business. This gets you to our $220 million to $240 million outlook for free cash flow for the year, still solid, but much lower than originally forecast. Despite our revised outlook for this year, the business remains fundamentally sound. We are investing in the facilities for the long term and ensuring that we maintain our best-in-class level of availability.

Let's move to the specifics of the quarter. We've included our usual waterfalls again for this quarter on slides 12 to 15. I know that you all find them useful. Similar to the last quarter, I won't go through them in detail. Of course, we are happy to take questions on anything in the slides later. A few general points that I'd like to make. First, note that we are up compared with last year on our key metrics. It's important to recognize that we have made good progress on a number of our growth initiatives to achieve this. Second, while you can see there's not much happening in year-over-year energy pricing this quarter, I did want to note that, for your benefit, on Slide 22 in the appendix, we've updated our long-term energy portfolio chart. This provides some detail on the various markets where we'll have additional energy exposure and the increase in megawatt hours that we will gain from contract transitions.

Lastly, on Slide 14, you'll see that working capital both related to our construction project and the working capital from the core business was a big driver in the increase in year-over-year free cash flow. Both the non-construction and the construction working capital reverse in Q4 and therefore, are a big negative factor next quarter. Because we regularly get a lot of questions on construction working capital, we've given a significant amount of detail on this topic on Slide 16.

This is a new disclosure for those of you keeping track. We wanted to provide some context as to why you've seen free cash flow decline over the past few years and what you may expect from construction working capital moving forward. By stripping out construction working capital, you can better assess the core cash flow generation of the business. As you can see, the working capital associated with our construction projects varies greatly from quarter to quarter and year to year. The construction projects we undertake are great projects and are linked to nice, long-term service fee agreements. Of course, we also achieved a modest profit for the construction as well. However, the payments are lumpy, and this moves the reported free cash flow around a lot in terms of quarterly reported numbers. Regardless, the swings in working capital will obviously zero out in the end.

In Q4, construction alone will negatively impact working capital by $25 million to $30 million depending on the rate of work completed. Based on our current outlook, it will also impact 2014 adversely by another $30 million to $50 million. But then it is expected to benefit 2015 by the same amount once all the contracted requirements of the Durham-York project are completed. As you can see -- assess Tony -- as you assess Tony's earlier commentary on 2014 and beyond in terms of free cash flow, I think it's important to normalize the construction-related working capital impact over 2014 and 2015.

I wanted to discuss growth investment trends with you. As you know, we've committed a significant amount of capital to these investments over the past few years. For your benefit, we've included a detailed comparison of our growth investment spend and outlook on Slide 21 in the appendix. This chart allows you to bookkeep us on where our -- a significant portion of our free cash flow is being spent. For now, let me qualitatively discuss these investments.

Let's go to Slide 17. In August, we announced the purchase of the Camden, New Jersey, Energy-from-Waste facility. This facility can process 1,050 tons of waste per day and has generation capacity of 20 megawatts. In 2012, we've processed 319,000 tons of waste and produced 146,000 megawatt hours of electricity. The plant has been well maintained and sits in a nice location. We are confident that we'll also be able to make improvements and share best practices with the plant as we integrate it into our portfolio. This is a small but important acquisition, which was accretive from Day 1.

Some of you have asked why we are not seeing more benefit from the growth investments, which have ramped up recently. The simple answer is this, these investments are helping us offset some meaningful headwinds that we have faced and continue to face in the business. For example, over the past few years, we've absorbed almost $80 million impact to both adjusted EBITDA and free cash flow due to just debt service passthrough billing declining. If you include 2014 in that number, the decline is about $100 million.

For your reference, we have laid out both the history and the future of debt service billing impact on Slide 23. We've also had some market -- above-market energy and waste contracts being marked to market. From a free cash flow perspective, our interest expenses also increased over the past 5 years as we have replaced short-term secured debt and a low-coupon convertible with longer-dated junior capital. This strategy has resulted in higher interest cost for the near term. However, we have taken advantage of the strong capital markets to increase our average debt maturity to approximately 8 years and improve our financial flexibility while still maintaining a weighted average after-tax cost of debt of just over 5%.

In terms of total amounts earmarked for 2013, the initial organic growth range of $75 million to $100 million is unchanged, with total spending now at $150 million to $175 million due to both Camden and the initial spending relating to the New York City contract. While we are still finalizing 2014 plans, we expect much less incremental organic growth investment, but we will have additional investment associated with New York City and Essex. A quick impact -- comment on the funding of New York City and Essex. At this time, we plan to finance the majority of the spend using efficient tax-exempt debt.

Let's move to Slide 18 to discuss shareholder returns. In the quarter, we paid out our June dividend in July, and we announced another dividend in September, which we just paid out earlier this month. During the quarter, we did not repurchase any stock. This is consistent with the capital allocation plan we've articulated many times before. We have a strong, stable dividend, which we hope to grow over time. To the extent we have attractive growth investments, such as New York City or Camden, available, we'll make those investments, and we'll use the stock repurchase program as the flex when it comes to our uses of free cash flow.

As you know, we actively evaluate our capital allocation plans, which include growth investments, dividends, buyback, and we will continue to seek to put cash to the best use in the long-term interest of shareholders. It is important to note that in 2013, we have already returned $99 million year-to-date to our shareholders and that between the return of capital and growth investments, we expect to use more than the free cash flow we will generate this year.

Before we move on to Q&A, I'll conclude by saying that, near term, we have our work cut out for us. The rest of this year and 2014 will be quite challenging. However, we have a number of opportunities as well. The benefit of the New York City contract will start to play out in 2015, and we'll maintain our focus on our organic growth initiatives. I remain very confident in the business, and I can say with certainty that our team is anything but complacent. Fundamentally, we have an amazing portfolio of assets that we plan to leverage, and we will do everything in our power to create shareholder value in the coming years.

Of course, when we talk again on our Q4 earnings call, we will have more details for you as we would have finalized our plans for 2014. In the meantime, over the next few weeks, we look forward to talking with many of you to address your specific questions and lay out the continued compelling investment thesis for Covanta.

Thank you. And now let's take some questions. Amy, can you, please, open up the phone lines.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Dan Mannes with Avondale Partners.

Daniel J. Mannes - Avondale Partners, LLC, Research Division

So first thing I want to touch on is, obviously, 2014. It certainly feels like there's kind of an evolution in the way you guys are discussing the prospects. I know in the past you'd kind of said your goal was modest growth over the period, with '14 facing some headwinds. It now feels, using the term "challenging," even against kind of easier comps in '13. It seems to indicate maybe modest growth, maybe even difficult. Can you maybe go to a little bit more detail on the puts and takes as you look at '14 versus '13, particularly in the context of some of the headwinds that '13 faced that shouldn't recur and the fact that you should be coming out of '13 with more organic growth? I guess I'm still struggling a little bit in terms of the way you've characterized '14.

Anthony J. Orlando

Sure. I guess I'll take that one, Dan. This is Tony. Again, it's still early in the process. We haven't yet finalized our planning for next year. And of course, it's our goal to grow. But it is going to be a challenging year. We've known that for awhile. But I think it's fair to say that as we look at it, some of those challenges have gotten a little bit steeper. And I think probably the biggest ones are the 2 things that we've highlighted, really, that our organic growth, while still quite good, came up a little bit short of where we had hoped it would. And so that means we'll be starting off a little bit lower base. And then the other one is that we're going to proactively address the unscheduled maintenance challenge, right? I mean that -- I think that's kind of the biggest thing going on this year. We've had, I think, a remarkably good track record with our boiler availability at 92% consistently. But this year, as I talked about earlier, we've seen some areas unrelated to the boiler, most notably the turbine generator, which, of course, is the other major component in the facility. And what we're going to look to do is employ, really, some of the same philosophies that we've been so successful with on our boiler to the turbine generator and proactively get in there to reverse the trend that developed this year. But it's -- I think it's fair to say that you can't reverse a trend overnight. This is a program that's going to take us several years. We'll go after the higher-priority items first and kind of work our way through that. But we did see a fair bit of unscheduled downtime related to turbines this year. And our goal is to reverse that trend, but it's going to take some time.

Daniel J. Mannes - Avondale Partners, LLC, Research Division

Can you quantify, within maybe a range, the incremental spend? And two, can you talk at all about the 2014 cash flow story, particularly in the context of both the working capital drag on -- from construction and secondarily, maybe some incremental costs around the convertible refi?

Sanjiv Khattri

Sure. Dan, Sanjiv here. First of all, as Tony said, the work on '13 -- '14 is ongoing. It's very preliminary. Because we were lowering our guidance for '13, we felt it behooved us to update you on how we see the challenges. As Tony pointed out, maintenance was probably new, all the others, you are aware of. I also want to mention organic growth will continue to be positively, even though it's starting from a lower base. And we'll have the full year benefit of Camden and all the other little good things we are doing. But I think it's probably premature to pin down specific numbers as it relates to what the delta could be. I could comment on free cash flow. First of all, as you saw on my Slide 16, I believe, with construction working capital, and again, it really depends on certain milestones that we have with our major construction project that's ongoing. But at this time, we expect that we will be short by $30 million to $50 million in construction working capital next year. That's sort of our current estimate. However, that will immediately flip in 2015. So whatever number we come out with or whatever number you think we have, you should probably normalize for that because whatever you see down, you should expect a pick -- equal pickup in '15. And to the extent that we are able to contractually complete certain milestones sooner, you'll see it happen sooner. But I'm trying to give you the best estimate possible. We have not yet made a decision on how we are going to refinance the convert that is coming due in middle of next year. But as I have consistently said, on the margin, the interest expense and interest cash cost will be higher than the convertibles cost it's complete -- currently replacing. I think our goal is to find the right space in the capital structure, which makes the most sense for us in terms of both long-term cap balance sheet flexibility and also the long-term cost of capital. So it will go up. But at this time, I would be speculating by how much. It really depends on what type of security Brad chooses and when he decides to go to the market.

Daniel J. Mannes - Avondale Partners, LLC, Research Division

But more broadly, I mean, the '14 cash flow story, given the combination of the challenging EBITDA conditions, the working capital drag and potentially higher interest expense, it sounds like that's obviously going to have some challenges as well. And not to throw in a third question, but I will because someone else will probably ask. But how does that play in maybe to the -- to your capital allocation plans for next year and potentially, use of cash? Because it sounds like you'll be even a little more constrained.

Sanjiv Khattri

Well, we, obviously, have not finalized our full plans. Our underlying policy that has basically been steady for over 3.5 years now since Sam and Tony laid it out in July of 2010 stays unchanged. We have 3 uses of capital, and our goal is long-term shareholder value, growth investments, a dividend, hopefully, that continues to grow and stock buyback. And we'll continue to allocate it. We do think our balance sheet has capacity. Otherwise, we will not be doing all 3 and sharing. Our stock buyback is obviously a flex. But as I said, we are very careful not to give our targets. What I can assure all of you is that we are very focused on long-term shareholder value, and we will direct our capital to an appropriate use with that goal in mind.

Operator

Our next question is from Hamzah Mazari with Crédit Suisse.

Hamzah Mazari - Crédit Suisse AG, Research Division

The first question, Tony, would just be on the maintenance outages. Could you help us understand how much of this is an execution issue or operational issue versus just a factor of the age of your facilities? Any sense how we should think about that? You pointed out, historically, you haven't had these issues. So just wondering is it an operational issue or is this sort of just the age of your facilities, frankly.

Anthony J. Orlando

No. Our team does a fantastic job of maintaining the facilities with great reliability and availability. But as I said earlier, our facilities are aging. They're an average of about 25 years old and -- in particular, on the turbine generators, but also some of the other ancillary equipment. We have started to see some areas that we need to address that hadn't appeared before. So what we're going to do is go after those proactively and without getting too far into the details, really try to look at those systems with the same rigor and the same philosophy that we have with the boiler. That's been very, very successful for us. And again, the boiler is still the vast, vast majority of our scheduled maintenance, of our -- any kind of downtime. That's still the big primary driver for the business, as you can imagine. It's a 2,000 degree fire inside of a very large 100-foot tall box with metal tubes. It requires a lot of maintenance. And we're going to use the success that we've had there and employ it to some of the other areas that, historically, wasn't necessary because they had extremely high availability and reliability for a long time. But now we're seeing some new items that need to be addressed. It's not an overnight item. I want to make sure that we're clear about this. We're going to go after the high-priority items first. We're going to do certain inspections, and then we'll address things as we see them. And we'll a work our way through it. But I do think that, that's going to -- it's going to take us a little bit of time to get there. And so we're managing the fact that the fleet is getting a bit older, and I'm confident that we're going to get there to the point where we'll have the entire facility in the same condition that we have the boilers once we implement this program.

Hamzah Mazari - Crédit Suisse AG, Research Division

Great. And then just a follow-up question on the New York City long-term plan. Maybe if you could just update us on how we should think about the ramp in investment in the $140 million. I assume it's gradual. And then also, do you guys consider logistics a core competency? Or is that an opportunity? I mean, you have all these small growth initiatives. Logistics seems like a bigger growth opportunity longer term. I know you're not in the collection business, but maybe any comments there.

Anthony J. Orlando

Yes. No, I think it is an area of opportunity for us. We currently -- obviously, we move a fair amount of waste via transfer station, via truck. We also have 1 facility where we move all the wastes via rail currently. Certainly, this contract will be our first in moving on barge. And we have expert contractors that will be subs to us, that will help us with that logistics. But we think that it is an opportunity for us to kind of think about how do we continue to leverage our assets. And as Sanjiv noted earlier, as we're making some improvements to the Niagara facility and the Delaware Valley facility that's driven by the New York City contract, that opens up doors to do other things, as we have rail connections and whatnot. So I think, long term, that there could be some more opportunities there, and I think that could be one of the kind of hidden benefit to that contract.

Sanjiv Khattri

Just to answer your question specifically on timing of CapEx, Hamzah, the $80 million relates to the Queens marine transfer station. We would expect to spend all of that between this year and next year, and we've laid that out for you, so that should be gone. And then the one for the New York City really depends on when the city gives us notice to proceed. But you should expect between 12 and 18 months from when we get the notice to proceed. That $30 million should go. In terms of the improvements that Tony referred to in Delaware Valley and Niagara, that money is -- also will be spent between '13, '14 and some residual money in '15.

Operator

Our next question is from Gregg Orrill with Barclays.

Gregg Orrill - Barclays Capital, Research Division

I was wondering if you could come back to the organic growth initiatives. It seemed like part of the weakness this year was just delay in getting some of the projects, investments completed. And so how do you feel about the downside from this year going away in '14 as the projects get a full year?

Anthony J. Orlando

Yes. A couple of things this year. In fact, it was really many, many small things that added up, but the couple that we focus a lot on, because they're our biggest single initiatives, are the metals and the special waste. And we had aggressive targets both in terms of our schedule to install maintenance -- I'm sorry, metals recovery, as well as aggressive targets to improve our special waste sales. And we really did quite well, I mean significant double-digit growth in special waste, but just not quite up to what we were hoping for. And so I think it's fair to say that, that grows off a slower base. On the metals side, hopefully, it's going to just be the fact that we're a little bit later, which hurts this year. And that we're still -- having said that, given the fact that we haven't actually got the -- all these systems up and running, we haven't kind of been able to test and verify that we're going to get the yield and the results that we thought we would. The -- where we have installed those early on, we've gotten the good results, almost spot on what we were expecting. So -- but we'll have to see how these -- the ones that are going in now and we fully expect to get very good results from those. And hopefully, that will -- well, I know that will -- is going to be a big contribution to helping next year. There's no question about that. The other thing in the organic growth is it really encompasses almost everything else that's going on in the business, right? So everything else, whether it's challenges with health care costs or any other challenges going on in the business, everything effectively gets rolled into that organic growth number. We break out the pricing on metals and energy. We breakout the contract transitions. We break out what's going on with the unscheduled maintenance, and then really everything else is left in that organic growth bucket. And so we're working to optimize that, and I know we're going to get some good results again next year.

Gregg Orrill - Barclays Capital, Research Division

Okay. And then I'd be interested in your updated thoughts on yield co drop-down vehicles as a source of low-cost capital. Particularly given long-term contracted nature of many of your projects, that would seem to fit.

Sanjiv Khattri

Thanks, Gregg. We -- as you remember, this topic came up last quarter when, I think, another company had launched such a vehicle. I think, at this time, it's fair to say that we did look at it, of course, because of the interest generated. At this time, if you look at the profile, and we studied some of the other companies that have been successful, and even though we remain very contracted and predictable business, we would not naturally fit the profile of the type of companies that had been out there on yield co. So some things would have to fundamentally change for us in terms of either our core growth trajectory and the longer-term nature of some of the contracts. So in a nutshell, I think, at this time, it's fair to say we do not see that as an opportunity. Having said that, we are always looking at ways, either through balance sheet or through operations or figuring out new ways to optimize the use of capital and improve our overall returns. So we are -- there are lots of things we are looking at, but a classic yield co, I don't think -- at least at this time, we don't think it works.

Operator

Our next question is from Ben Kallo with Robert W. Baird.

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

As we look ahead to the PPA transitions for next year, is it safe to say that, that $10 million to $15 million is straight EBITDA?

Sanjiv Khattri

On the margin, that's exactly right, Ben. On the margin, absent any other changes, there may be some contract transitions that may have other differences as linked to it. But on a simple PPA, yes, every change in revenue, both positive and negative, flows to the bottom line.

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

And I know that it's not time for specific guidance yet, but just as I crunch the number, I kind of get to flat year-over-year type numbers, without, gaining some upside from gas or metals or things outside of your control?

Sanjiv Khattri

Again, very careful not to comment on that, as Tony pointed out, a work in progress. What we did want to do was to lay out, as we see, the big items affecting our performance. Obviously, we will work hard and try to come up with as aggressive a plan as we can. But that's a discussion to be had when we released 2013 earnings and released our guidance.

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

Okay, understood. And then finally, I guess on the unplanned maintenance having a little -- having some of that stretch into 2014. I guess with some of, Tony, your comments earlier about this is not all going to be done at once, what's the likelihood that we see some of the same happen in 2015 that act as a headwind? And then possibly, maybe if you could comment, Sanjiv, on as we look to 2015 and maybe some of the headwinds you face from cash taxes going up as well, all combined in there.

Sanjiv Khattri

Well, I'll address the last topic first very quickly. When we last updated our NOL outlook, we said mid-decade, and that still happens to be true, [ph] If anything, sort of in a very perverse sort of way. To the extent that our operating performance lags a bit, that actually extends the life of the NOL. So we do plan to give you a much better update when we meet in February because we would have completed all our analysis. But at this time, I would be surprised if we had any free cash flow headwinds in '15 due to the NOL. But that's something we have to flush out a bit more. I think Tony did say that some of the maintenance spend is a multiyear issue. And clearly, we would be speculating, at this time, what we mean by how much amount. Some of the unscheduled may become scheduled because it would be planned as part of our exercise, but I think it would be premature right now to discuss any numbers for '14, leave alone '15. But the activity, both in expense and capital, will moderately go up. Anything to add, Tony?

Anthony J. Orlando

No. I think that's right. But just to kind of take a step back and think about it, I mean, the unscheduled downtime is something, first off, that is normal in our business, right? We have large complex power plants, and we always have scheduled and unscheduled downtime. And so really, the question is what's the level and what's the mix between the 2 because the scheduled is more cost-effective than unscheduled, as you can imagine. But I think it's fair to say that those don't -- typically, the downtime trends don't typically move in a step function. They're trends, and what we're going to do is proactively jump in there and work to reverse that trend and as I talked about earlier, really look to employ some of the things that we've had great success on with our boilers and other areas of the facility.

Operator

The next question is from Michael Hoffman with Wunderlich.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

On the unplanned maintenance, Tony, can you frame for us what the full year pattern of that has been, say, for the last 3 years, year-to-date? So we've got roughly $15 million this year. What was it in '12? What was it in '11? Just so we understand the delta that we've gotten to deal with this year.

Anthony J. Orlando

The numbers that we're talking about, the $15 million, is really versus our internal expectation. So we're focused on what it looked like this year. And the majority of it was really in that first quarter related to turbine generators, and we also had one -- fairly meaningful one related to an air cool condenser. We had a bit more than we hoped in the third quarter, but we also had a couple of other things go against us in the third quarter. So I think we're really looking at it compared to our expeditions for this year, which our expectations this year is we would have similar unscheduled activity to prior years.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay. So just so I'm clear, this is a $15-ish million incremental to an expectation that's always there, and it runs about a number -- and that number has been relatively constant?

Sanjiv Khattri

Give or take. If you go to Exhibit 10B, we show you maintenance expense year-to-date. And of course, some of it has to do with timing of projects, of outage projects, but you see that number is up year-over-year. So as you can see, some of it is revenue. So did we have some unscheduled maintenance last year? Yes, we did. But it was not big enough to get noticed, and so you can make your assumptions. We always assume certain amount of downtime. Because these were so big and concentrated, we felt it was important to share with you.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay. So I'm trying to understand the messaging with regards to next year then on this. Is your anticipation that you'll get back to a normal pattern, but you'll then increase some expenses to address pulling the turbines and the air cool condensers into a more intensive preventive maintenance? So your -- so to repeat myself, the expectation is, in '14, I go back to a more normalized unscheduled cycle but I'll have more dollar spend to improve preventive maintenance?

Anthony J. Orlando

Again, we're still -- we're in the process of fleshing out exactly where we are in '14, and we'll lay that out when we get to the guidance for 2014. I don't know any other way to say it. I've tried to say it in a number of different ways. We are going to proactively get in and do some additional inspection and look at some of our turbine generators, given what we've learned this year. And this process is going to take a little while. It is not going to happen overnight. So we'll get into the specifics when we lay out the 2014 numbers.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Yes, okay. But I'm -- I've been asking, actually, about a number, as much as I -- dollars, specifically. Just the messaging -- am I right about what you're saying, messaging is -- you would anticipate going back to a more normalized unscheduled but you'll introduce more operating expense to incorporate a greater amount of preventive maintenance? Is that...

Sanjiv Khattri

I think that's maybe a bit simple. If I could, I think there will be some unscheduled outages next year, there always is. The question is, will it be big enough that we would flag or will it be as part of our overall planning. So in our operating expense and our maintenance expense, we always assume a certain level of unscheduled. And we will -- when we finalize '14, we'll make sure that we factor in some of our new learnings from 2013. You are right in concluding that both expense and capital will moderately go up next year, and we'll all have to add it all up and see where we end up.

Anthony J. Orlando

Yes. I think that's the key takeaway at this point. Again, we're still on the process. But we do expect it to -- the expense and capital to moderately go up. And that's what we are doing because of what we've seen this year, and it makes sense for the long term in the business. But I do want to emphasize, fundamentally, the maintenance program is not changing. I just -- I really want to emphasize that. Most of our maintenance activity on all the fundamental things we do to ensure reliability for our customers and for ourselves and for our shareholders and to be safe and environmentally sound at our facilities. There's nothing fundamentally changing. The key focus that we maintain in our plants, with a great deal of success, is on our boilers and all the other ancillary equipment. We're really making a couple of tweaks based on some of the things we've learned this year around the turbine generators primarily, but also a couple of other piece of equipment to get out in front of this, and it's just going to takes us a few years to do that.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay, second question. So I followed this, you've talked about it, I just want to make sure I've got my list right. On free cash flow, the adds would be Camden, the onetime aspect of this lost steam energy issue between the 2 customers, lower SG&A because of international development savings and organic growth. Those are the key ones on the add side. And on the negatives, I've got the negative from lower debt service. I don't get the benefit of the gain of the PPA, so that was onetime this year. I've got more working capital because of construction, and I'm going to spend a little more -- have a little more maintenance related to what we've just discussed. Those are the key puts and takes to whatever we choose to come out with as a free cash number?

Sanjiv Khattri

That's what we've sort of discussed with you. As I said, when we have the whole -- I don't know, we see that you are talking...

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

I get you're going to give me data later, I just want to make sure I got my list right. That's the right list?

Sanjiv Khattri

I think you've got -- these are all the things we flagged, so you were -- you were taking notes well.

Operator

Our next question is from Al Kaschalk with Wedbush Securities.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

I'll try to make this brief here, but Tony, I just wanted to get a clarification on the organic growth trend and some of the smaller initiatives and in particular, why maybe they didn't materialize at the rate, internally, you had hoped. So is there -- was that a conscious decision on your end? Or was it customer, facility related that pushed some of these things, maybe out is the right word?

Anthony J. Orlando

Well, the 2 that are most visible really are the metal projects, and that's largely relating to the projects being completed later than we anticipated. But so far, we're getting the results we expected. More testing to come on that, but so far, so good. And then on the special waste, look, we targeted a very significant growth rate. We're still growing meaningful double digits in that area, and I believe we'll continue with a long runway to grow in that area because our customers like the service we provide. And we're providing an environmentally-superior product to landfills, and I think that, that area is going to continue to grow. It's just -- we're a few percentage points below what we are targeting to grow at. So nothing really fundamentally has shifted there, just we're ticked down below where we thought we'd be. And those are the 2 big ones for this year.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Okay, fair enough. I appreciate the special waste comment. Given availability and integrity rates of the boilers, I can certainly appreciate those comments. And then my final follow-up is on -- would you be willing to share any update, and I apologize if I missed, on Dublin and maybe time frame or major milestones over the next 6 months that you're looking at?

Anthony J. Orlando

Well, I think the short answer is that there's really not much new to say about Dublin. We're frustrated that it's taking as long as it has. I think it's fair to say that is the nature of energy from waste development, but it seems to be more so the case in Dublin than on most projects. It's just taking a very, very long time. I think that, at this point, though, we are spending very little money, and we still believe it's a good project for us and for our client. The client still believes it's a good project, and we'll see if the various approvals come through. And if they do, then we can move forward. So we're just going to have to wait and see on the timing.

Operator

Our next question is from Jeff Osborne with Stifel.

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Just 2 quick questions. I think you answered it, and that was the question on the special waste side. But I'm just trying to get a sense of the sequential movement. You talked about double-digit growth year-on-year. But what happens sequentially on the special waste, in particular? And then a follow-up on that, are you looking to add any additional sales capability there? Any process steps to hit the milestones for next year?

Anthony J. Orlando

I don't -- you know what the quarter-on-quarter growth is, Sanjiv, on special waste?

Sanjiv Khattri

It's close to 15%. Well, year-over-year, we're giving $55 million run rate last year. We expect that to grow double...

Anthony J. Orlando

Yes. He was asking what it was sequentially on the quarter.

Sanjiv Khattri

It was about 10%.

Anthony J. Orlando

It continued to grow sequentially on the quarter, I can say that. I don't have the exact number in front of me. But -- so we're really -- we have done a lot of things there, including ramping up our sales costs and our marketing efforts. And we continue to see success not just in the special waste area that we would traditionally define as special waste, but also in what we see as bundled services. And we're looking to see how can we expand that and grow that, we've had a great deal of success with that in the Connecticut and Massachusetts area, and how might we be able to leverage that in other areas. What additional services can we provide? Where -- the customers are looking to find ways to reduce what they send to landfills and move up what's known as the waste hierarchy, which is reduce, reuse, recycle and recover energy from waste. And so we think that we've got some nice opportunities for a long time to come to continue growing that special waste, that bundled services. And that's something that we're going to be very, very focused on as part of the future of the business. Meanwhile, somebody did give me the numbers, and yes, in fact, we are up a very healthy amount quarter-over-quarter, actually fairly consistent with what we're up year-over-year. So we continue to grow at a nice healthy double digit pace.

Sanjiv Khattri

Nice double-digit number.

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Got you. And then one clarification and one quick question for Sanjiv. Did you -- I may have missed it, did you mention what spot tip pricing was in the quarter, what the trends there were? And then I wanted to understand -- I understand the maintenance procedures haven't really changed, in light of what happened with the unscheduled downtime. But is there any sense of scope that will be in a discovery mode for you as you have your seasonal downtime over the winter? So perhaps you don't know what you're getting into yet, and then as you kind of get in there with traditional maintenance periods, then things will be brought more into light and you'll have more details to add as you provide the guidance next year.

Anthony J. Orlando

Yes. Let me take that one. I think that's actually a very good question in terms of how we think about it. And one of the things that's unique and different about turbines than boilers, boilers we shut down once or twice a year for scheduled maintenance. We maintain, we clean, we inspect, and we plan for the next maintenance. And so you're constantly kind of in -- literally, inside the equipment. Turbine generators are very different. They're designed not to be opened up or brought down for a very long period of time. Typically, maybe 6 to 8 years before you would actually shut them -- the machine down and open it up to inspect it. We are -- one of things we're doing proactively is we're going to shut those machines down more frequently to do some inspection next year. And so that process is -- in fact, it's actually starting late this year. So we're doing that now, and that's one of the things that we're going to -- we'll assess as we go in to inspect what needs to be done.

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

And then on the spot tipping side? I might have missed that one.

Anthony J. Orlando

Sorry. Well, I did -- I just forgot it. I've had so many maintenance questions. Yes -- no, spot, I don't think, actually, we've covered spot pricing. I'd say it, generally speaking, is still soft for us, but it really is very location-dependent. I think in some of our areas where we have more spot waste exposure, we've seen more acute softness now. In particular, where we've got more spot waste exposure that's been areas of challenge are Niagara Falls and Delaware Valley facilities. Obviously, that dynamic will shift when we start to fill that spot up with the New York City contract. I think some of the other areas of the country have been a little bit better, but I think generally speaking, as we say, it's still fairly soft market but getting maybe a little bit better in certain areas. And we think with the New York City contract, long term, that's going to help stabilize that.

Sanjiv Khattri

Remember, Jeff, it all matters where it is, and some of our spot waste market is in some of the weaker markets in terms of incremental waste pricing.

Operator

Our next question is from Barbara Noverini with Morningstar.

Barbara Noverini - Morningstar Inc., Research Division

So given that 2014 is expected to be a challenging year and you won't be able to fully monetize your investment to serve New York City until 2015 and unplanned challenges have prevented you from really fully realizing the full benefit of your growth investments to date, it appears reasonable to expect depressed ROAs and ROICs through 2014, maybe part of 2015. If so, could we expect to see these metrics improve once the New York ramps up? What are you focusing on as the main drivers of ROIC improvement going forward?

Sanjiv Khattri

Well, Barbara, we have 2 things. First of all, obviously, you need to step back and look at what the overall cash flow that the whole enterprise is generating from both its current assets and its incremental investments. And even though we are disappointed that we had to lower our free cash flow for the year, we still are at fairly strong levels even at $220 million to $240 million. I wish it was much higher, but we took you through where we are. In terms of incremental investment decisions, we do have a very rigorous process, where we assess the dynamics and the risk and benefits of each project. And it's fair to say that each project actually exceeds its appropriate cost of capital. That is very important about that. And if the investment is a bolt-on to our current facility, like a metal system, then you would expect the returns to be much higher and the payments -- the paybacks much more accelerated. If, on the other hand, it represents what I call, sometimes I'd like to use the word offense/defense, a bit of defense, where -- which allows us to have some visibility to revenue streams over a long period of time, then the returns may be more modest. I don't see that process fundamentally changing. It's not like we are capital-constrained, that does not -- that is not -- having said that, we remain very capital-disciplined. And it is an irony that even as we have some operational challenges, which are near term and are no commentary on the fundamental strength of the business, we also happen to have a bunch of opportunities that we were -- we -- rightfully so, because of the balance sheet capacity we have, we rightfully so are going after. So we have a rigorous ROIC process for incremental investments. And overall, we are obviously very focused on generating cash because then that allows us to do a lot of things.

Operator

And our last question is from Carter Driscoll with Ascendiant Capital.

Carter W. Driscoll - Ascendiant Capital Markets LLC, Research Division

Most of them have been answered, but I want to maybe drill down a little deeper into Camden. Obviously, you've only had this facility for a short time, but maybe you could talk about it in the context of your expectations for its operating performance and waste volumes, given you don't have a contractual commitment in that area? Has that been performing, at least initially, to your expectations? And then, overall, as it pertains to your growth initiatives, what part -- were does M&A play or fall in that spectrum in terms of opportunities and then your willingness, obviously, to lever up the balance sheet in order to try to pursue these types of acquisitions?

Anthony J. Orlando

Yes. The Camden facility, I think, is kind of squarely in our sweet spot. It's located in southern New Jersey. It's close to our other facilities. It's close to our home office here. It is essentially a fully emerging facility on electricity and does have some contracts on waste. But that's why we think we could really add value there. The plants have been well maintained. We -- not to say we don't think we can maybe do some things to leverage our expertise on that side, but we really think that -- where we can add value. And that, of course, is the key to any kind of acquisition, is what can the new owner do to add some value. We think we can add value on waste supply and how do you manage the electricity output. And so far, so good. Obviously early, but the facilities kind of fit right in, and confident that's going to be a good, strong investment for us. In terms of other future acquisitions, I think we've had a pretty good track record with acquisitions, and we do have the financial flexibility, as Sanjiv described earlier, to do things if we see something that fits both the strategy and we think, is at the right price, where we can create value. So we've had a track record in the past of doing acquisitions successfully that we think makes sense, and we'll obviously keep our eye out for additional opportunities in the future.

Carter W. Driscoll - Ascendiant Capital Markets LLC, Research Division

Okay. Maybe just a quick follow-up. I realize it's getting long here on the call, but could you at least -- could you address the number of your facilities that you've implemented the metals capture, the number that it's a bolt-on versus maybe a new installation? And maybe, at least at a high level, talk about where one is more profitable than the other, at least the difference between a bolt-on, which I'm assuming is more profitable than a completely new install. Maybe frame out, incrementally, how one might impact versus the other in terms of margin, at a very high level.

Anthony J. Orlando

I think the metals projects have all been very good, and there's really kind of 2 -- 3 areas that we're going after on metals. One is how do we recover more ferrous by, for the most part, slight changes to the existing system. So every one of our facilities already had ferrous metal recovery and they have for a long time. But what can we do to get a little bit more out? What can we do to make that metal more clean and therefore, more valuable? Then we had -- historically had non-ferrous recovery for only a certain portion of the ash and only, really, at our large facilities. So we've now started to implement the non-ferrous recovery at many, many of our facilities. The economies of scale are obviously better at the larger facilities. And then the third area is the -- what we call the small non-ferrous, which, historically, we didn't even try to capture, very small pieces of non-ferrous. We implemented our first system at a large facility, again economies of scale, at Fairfax County a year ago. And we're now doing that other large facilities as well. So I did mention in the prepared remarks that we are starting to kind of get on to what we would say the downhill side of the investments. So I think next year is when we'll see, really, the full benefit of what we've done this year. We've got a few more investments to make. And then lastly, we are looking at a joint venture that we have talked about in the past, where we're looking to actually mine existing ash landfills to recover metal that was missed historically. And we have our first of those. It's going to be starting up in the coming months, early next year. And so we're going to be keenly interested in the success of that project because, if it works as we anticipate, we think that will create some opportunities for us as well.

Operator

That concludes our question-and-answer session. I would like to turn the conference back over to Mr. Tony Orlando, Covanta's CEO, for any closing remarks.

Anthony J. Orlando

Well, thanks, everybody. As Carter said, the call is getting long, but just a couple of comments to wrap things up. The business remains fundamentally strong. We've -- all the things that I like about the business and hopefully, you like about the business are the same. We've got great locations on our assets. We've got a portfolio that's virtually impossible to replicate. We provide a service that's essential to municipalities and to commercial customers, and we do it in a way that's environmentally superior to the landfill alternatives that's still predominantly used in this country. And so we think there's some great long-term upside, and we're going to continue to work as hard as we can to deal with some of these short-term challenges and focus on long-term value.

Operator

The conference has now concluded. Thank you for attending today's presentation. Please disconnect your lines.

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Source: Covanta Holding Management Discusses Q3 2013 Results - Earnings Call Transcript
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