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Covanta Holding (NYSE:CVA)

Q4 2013 Earnings Conference Call

February 12, 2013 8:30 AM ET

Executives

Alan Katz - VP, IR

Anthony Orlando - President and CEO

Brad Helgeson - EVP and CFO

Analysts

Hamzah Mazari - Credit Suisse

Michael Hoffman - Wunderlich Securities Inc.

Daniel Mannes - Avondale Partners

Gregg Orill - Barclays Capital

Scott Levine - Imperial Capital

Carter Driscoll - Ascendiant Capital

Barbara Noverini - Morningstar

JinMing Liu - Ardour Capital

Albert Kaschalk - Wedbush Securities

Operator

Good morning everyone and welcome to the Covanta Holding Corporation's Fourth Quarter and Year End 2013 Financial Results Conference Call and Webcast. This call is being recorded and a replay will be available later this morning. For the replay, please call 877-344-7529 and use the replay conference ID number of 10038565. Webcast as well as the transcript also will be archived on www.covanta.com.

At this time, for opening remarks and introductions, I'd like to turn the call over to Alan Katz, Covanta's Vice President of Investor Relations. Mr. Katz, please go ahead.

Alan Katz

Thank you, Keith, and good morning. Welcome to Covanta's Fourth Quarter and Year End 2013 Conference Call. Joining me on the call today will be Tony Orlando, our President and CEO and Brad Helgeson, our CFO; and Tom Bucks, our Chief Accounting Officer. We will provide an operational and business update, review our financial results and then take your questions.

During their prepared remarks, Tony and Brad will be referencing certain slides that we prepared to supplement the audio portion of this call. Those slides can be accessed now or after the call on the Investor Relations section of the website. The prepared remarks should be listened to in conjunction with these 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 such differences can be found in the company's reports and registration statements filed with the SEC.

The content of this conference call contains time-sensitive, information that is only accurate as of the date of this live broadcast, February 12, 2014. We do not assume any obligation to update our forward-looking statements or 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 measures and management's reason 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, 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 Orlando

Thanks Alan and good morning everyone. Before I begin, I'd like to mention something that most of you already know. Late last year, we appointed Brad Helgeson as Chief Financial Officer. Brad has been our Treasurer since joining the company in 2007. Since then, he has been a key part of our senior team, and he has been able to jump right into his new role, without missing a beat. I believe Brad's approach to IR will provide new clarity to help you assess your business, and I am confident, that he will do a great job as our CFO.

Now, on to the business review; I will start with a quick summary of the year. For those of you using the web deck, please turn to slide 3. The full year results were consistent with our revised guidance ranges, but slightly below the guidance we issued at the beginning of last year. This was largely due to higher than expected unscheduled maintenance, and coming in a little below our target for organic growth. Therefore, its no surprise that two of our key priorities for 2014 will be to implement our proactive maintenance program, and achieve our organic growth targets. I will talk more about both of these subjects later. But first, let me quickly review our 2013 accomplishments.

We signed a 20 year contract with New York City to transport and dispose off waste from two of their marine transfer stations. We extended several municipal client contracts, totaling 1.5 million tons per year, with an average life of five years. We acquired 1,050 ton per day energy from waste facility in Camden, New Jersey, and we invested over $80 million into organic growth. These investments will bear fruit in 2014 and beyond.

In addition, we decided to sharpen our focus and cease our development efforts in the U.K. As a result, this is now considered discontinued operations. We have provided consolidated numbers on this page, so that you can compare on an apples-to-apples basis, our 2013 performance against the guidance we issued last quarter. The rest of the deck and all of our discussion will focus on continuing operations, which excludes U.K. development spending from our historic numbers.

Moving on, we closed out the year with a flurry of activity. In November, our TARTECH joint venture officially started up as first metal recovery project. This is a new system, is recovering metal from our ash landfill in Peabody, Massachusetts. We are still in startup mode, and with the cold winter weather, we haven't been able to run this system as frequently as we'd like. But still, early indications are, that the system shows real promise.

Our Pasco, Florida client extended our service unit by eight years. I was particularly pleased to hear their comments on our excellent service in the public meeting, prior to the approval of the contracts. Our Alexandria, Virginia client also extended our agreement, and they too made positive comments about our service during their public discussion of the contract. These are both good examples of the mutually beneficial long term relationships, that is the foundation of our business.

Our Lancaster client purchased the Harrisburg facility in December. They had been a true leader in the industry for years, and we enjoy an excellent relationship with this client, having operated their facility in Lancaster since 1991. They renamed the Harrisburg facility, which is now known as the Susquehanna Resource Management complex, and they signed an agreement for us to continue to operate in that facility. We also settled our loan receivable with the Harrisburg customer, as part of the overall transaction. This was a good outcome to a difficult situation.

Lastly, in December, we completed the acquisition of two transfer stations in Northern New Jersey, which have a combined capacity of 2,500 tons per day. These stations are nicely located to complement our nearby facilities.

In total, during 2013, we invested $162 million back into the business in a combination of acquisitions, the New York City contract and organic growth. We also returned $121 million in capital to shareholders through dividends and share repurchases. Now, our priority is on executing in 2014 and driving long term value. We will again be focused on free cash flow and adjusted EBITDA, and our 2014 guidance for these key metrics is as follows; $470 million to $500 million of adjusted EBITDA, and $170 million to $210 million of free cash flow. This guidance is based on commodity prices and market factors that I will discuss in a few minutes.

But let me first give you the big picture overview. We expect our adjusted EBITDA to be flat to slightly down compared with 2013. We had two things working in our favor. First, the organic growth investments we made will pay off with increased metal, special waste and steam revenue, and second, we are seeing higher market energy prices due to the cold weather. Working the other way, we have several above market contracts transitioning down to market, and our increased maintenance spend.

Free cash flow is also expected to be flat to slightly down, excluding the impact of construction working capital. We believe that that's the right way to look at it, because the negative construction working capital in 2014 is just timing. It will reverse with a similar benefit in 2015, when we receive our final payment for completing the Durham facility.

Now, let me move on to our discussion of the operations in a more detailed outlook for 2014. We will start with waste on slide 4. As you can see, in the press release and web deck, we have included some new information to help you understand our business. First, we have broken out our EfW from other North American operations. Further, in the press release exhibits, within the EfW numbers, we split our contract transitions and transactions, so that we can clearly show the movement, in what we will call, same store sales. Within the same store sales, we can then focus on what's driving results.

So, let's look at this new information, as it relates to the waste revenue. In our 2013, our same store sales, waste processing revenue, which excludes debt service and certain other revenue streams was up 1.2% year-over-year. We realized an average price increase of 0.5%. The price increase was driven by servicing contract escalations of a little better than 1%, and the increase in our special waste revenues, which grew by 16% to $65 million. Remember, special waste commands a higher price based on the service we provide, and when we increase this volume, it displays this lower priced waste.

This growth was partially offset by lower spot prices and the mark-to-market on some waste contract renewals. In addition to the price increase, we generated a volume increase of 0.7%.

We anticipate that approximately 80% of our waste will be contracted in 2014, about the same as last year. The revenue per ton numbers in this table are based on waste revenue excluding debt service and other waste revenue, divided by total tons. Our 2014 outlook is for essentially flat revenue per ton. Let me take you through the reason for this outlook.

On the positive side, spot market prices have firmed, plus we expect to benefit from contract escalation, and our targeted double digit special waste growth. However, these benefits will be offset by two things; we expect a small volume increase at facilities with lower price per ton, and we should have some above market tip fee contract transitions that will affect this year and next. I should point out that volume increases at lower price facilities is a good thing, but it does reduce our per ton revenue. So, when taking all this in due account, including the reduction in debt service revenue, we expect total waste revenue to be about flat.

Moving on to our energy revenue, please turn to slide 5; on a same store basis, compared with 2012, energy revenue was slightly up. We had a small increase in output, but prices were slightly down. This revenue was lower than we anticipated at the beginning of the year, due to factors that we already discussed last year, on scheduled down time, lower steam demand and some utility disruptions. 2013 overall energy revenues increased by $23 million, due to the increased share associated with transitions from service fee to tip fee contracts.

Now looking ahead, in 2014, our total economic energy output from our Energy from Waste facilities is expected to be in the range of 5.5 million to 5.7 million megawatt hours. This is an increase of about 200,000 megawatt hours versus 2013, which is primarily due to the Camden acquisition and service fee contracts transitioning to tip fee.

Continuing to look at just our EfW facilities, entering the year, we have approximately 3.1 million megawatt hours of output contracted, with an average price of $65 per megawatt hour. Note, this exclude capacity payments. Plus we have 1.4 million megawatt hours of output, that has been hedged with an average price of $44 per megawatt hour, and that leaves our remaining EfW output, which is about 1 million megawatt hours exposed to the market.

Our guidance is based on full year average natural gas price of $4.50 per MMBTU at Henry Hub, which reflects the recent strong prices. We continue to methodically hedge 2015 and 2016 to gradually reduce our volatility. At this point in time, we have hedged 900,000 and 400,000 megawatt hours in 2015 and 2016 respectively.

In terms of our biomass operations, we currently are running four of our seven facilities, and expect they will have higher adjusted EBITDA year-over-year, given the higher energy prices this winter and the better prices for renewable energy credits generated by our main facilities.

Before I move on to metal revenue, I want to pause and discuss our long term energy profile. We have historically talked about our contracted prices being in the mid to low $70 per megawatt hour. That included electricity price and capacity payments. We have now split that out. For those of you not familiar with this, we typically get paid a fixed monthly capacity payment for being available, plus a price per megawatt hour for the electricity we actually deliver.

Our 2014 capacity revenue will be slightly down due to contract transitions, after which we expect capacity revenues to be essentially flat until 2017, when these revenues will be primarily driven by the PJM and New England ISO auctions.

Looking at our average contracted price excluding capacity, it is currently at about $65 per megawatt hour. That may appear to be meaningfully above the market, but its not. Let me explain; of the 3.1 million megawatt hours of contract output, about half if secured under very long term contract. By long, I am talking about contracted run from 2021 to 2033. These contracts could cover predominantly steam customers and attractive markets such as Long Island and Hawaii. We entered most of these contracts recently, so its fair to say they are representative of market pricing.

For our contracts that expire this decade, our average price is about $57 per megawatt hour. Based on the current forward curve, these contracts are not far off the market, but of course, that's just a snapshot in time, as we all know, energy markets can change quickly. So when you are considering our long term energy profile, I believe the key point is this, market price changes, for better or worse, could easily divert the impact of energy contract transitions. Therefore, we provided you with the information on our market exposure over the next five years, so you can take your own view on how this might play out.

Now, let's move on to the metals on slide 6; we had a very good year in terms of growing our metal recovery. We invested $37 million to install over 20 new or upgraded metal recovery systems; combined with our 2012 investments, we put $52 million into metal recovery systems. I have no doubt, this will pay off, even though our results in 2013 were lower than expected. Our plan was ambitious, and we took a little longer than hoped, to build and startup these new metal recovery systems. Still, we were able to squeeze out a $1 million metal revenue gain, despite a 7% and 4% decline in ferrous and non-ferrous pricing respectively.

More importantly, we came in within 1,000 tons of our year end target run rate. Specifically, we finished the year with a run rate of 340,000 tons of ferrous and 24,000 tons of non-ferrous. Using our expected 2014 market prices, that run rate yields a 4X EBITDA multiple on the investment. That's a pretty darn good return, both for our shareholders and the environment. Plus, we have another $10 million to $15 million of metal recovery investments planned during this year.

Overall, I am pleased with the position we put ourselves in, to grow metal revenue. In 2014, our goal is to sell between 350,000 and 380,000 tons of ferrous and between 25,000 and 29,000 tons of non-ferrous metals. Our 2014 guidance assumes an average ferrous metal price of $165 per tons. This is lower than the current market pricing, as we expect to pull back in the ferrous prices during the year, given some of the news we have seen out of China and Turkey. Our pricing assumption on non-ferrous metal is $900 per ton. This is in line with current market pricing.

I want to spend a few minutes now discussing our maintenance, so please turn to slide 7. Plant maintenance expense at our EfW facilities was up $6 million in 2013 on a same store basis, compared with 2012. That's not a big increase, but it was higher than expected due to unscheduled maintenance and extended outages at certain facilities. As noted earlier, we fully assess the trends we are seeing, and we decided to proactively increase our maintenance for a couple of reasons.

First, we want to provide greater safeguard against significant interruptions in our energy revenue. To that end, we are standardizing and enhancing equipment protection, and conducting more frequent inspections for our turbine generators. We have historically conducted major turbine outages about once every seven years, that's industry standard.

Now, we are adding minor outages in between the major outages. The primary purpose is to conduct additional inspection, in order to gain information, which will lead to improved planning for the subsequent major outage. However, if during the minor outage, we see anything that warrants maintenance, before we put the machine back in service, we will of course take care of that right away. To be clear, we are looking at a typical year for scheduled major turbine outages. In addition, we will be conducting planned minor outages, on about a quarter of our units. That's a big part of our new proactive maintenance program.

The second component of our proactive maintenance program relates to enhancing the integrity of certain long-life facility components. This includes systems that typically have a life in excess of 20 years. Examples would be, certain high voltage electrical equipment or cranes or air-cooled condensers and the like. We have been doing this type of work for some time, but we are increasing the level of activity. This work will span many years.

Our guidance has included the revenue and cost impact of this proactive maintenance work, including a reasonable assumption for the maintenance we may determine to be necessary, after we shut down the turbines and complete our inspections.

So, let me sum this up; our guidance assumes EfW maintenance expense in 2014 will increase by $10 million to $20 million, and maintenance CapEx will increase by approximately $10 million. This new level of maintenance spend, represents a reasonable go forward run rate. This is money well spent. When we combine these enhanced maintenance program with the great work we have been doing for many years on our boilers, it will ensure we continue providing our clients with world class service for many-many years to come.

Turning to slide 8; let's summarize our business outlook. Our focus in the near term, is to optimize and enhance our core EfW portfolio here in North America. To that end, we will focus on continuous improvement in all aspects of operational performance, as well as executing important projects, including construction of the Durham EfW facility scheduled for completion late this year, and undertaking all the work necessary, to begin accepting waste under the New York City contract early next year.

These are the things we do best, and that translates into outstanding customer service, as evidenced by our track record of extending contracts. A record that we hope and expect to build upon again this year.

To enhance value, we will be focused on organic growth initiatives, including metal recovery and growing sustainable waste solution offerings, including special waste. Furthermore, we see strategic acquisition opportunities, like the deals we completed last year. We will certainly pursue those as well.

I continue to see great strength and stability in our business. Our people are committed to capitalizing on that strength, to service our customers, and create long term value for our shareholders. I am confident we will do both.

And now, I will turn it over to Brad, for his first official earnings call as our CFO.

Brad Helgeson

Thanks Tony and good morning everyone. I have spoken with a number of you in the past, and I look forward to meeting many more of you in my new role. Covanta is a great company, with irreplaceable assets, high EBITDA margins and strong free cash flow. Our total share over the past year fell short of all of our expectations, but the business is strong, and I am really excited about the opportunities that we have to generate significant shareholder values going forward.

Now on to the financials; I will start today with an overview of the year-over-year drivers for revenue, adjusted EBITDA, free cash flow and adjusted EPS, using our waterfalls comparing 2013 to 2012 results. As Tony mentioned, we have reclassified the results in connection with our U.K. development efforts as discontinued operations in the 2012 and 2013 financials, as presented. So the numbers that I will discuss now will be on a continuing operations basis.

You will see in the coming slides, that we have revised the layout of the waterfalls a bit, to highlight the results of our core North American Energy from Waste operations, which Tony alluded to earlier. Together with the new disclosures in our press release, to provide financial information and operating statistics for the EfW business, our goal is to provide a clear and consistent framework for you to assess the performance of the business, and the key drivers, both historically and perspectively.

The structure of our service fee contracts is somewhat unique and can create some noise in the financials as the contracts transition. However, if you look at this business as an overall portfolio of waste, energy and recycled metal revenue, rather than a collection of contracts, people find it much easier to understand and to model. Hope that the new disclosure will provide a starting point for that. [Indiscernible] the new disclosures in the coming days, Alan and I are happy to answer any follow-up questions.

Now please turn to slide 10; revenue in 2013 was $1.63 billion compared to $1.64 billion in 2012, a decline of $13 million. Same store revenue growth in our North American EfW portfolio was $17 million year-over-year, driven by higher special rates revenue, non-ferrous metal recovery and energy production. We also had a net increase in revenue of $8 million related to service fee contract transitions, which was essentially a higher share of energy revenue, offset by lower debt service revenue.

Overall, these revenue increases were more than offset by lower construction revenue year-over-year, primarily due to the completion of the Honolulu expansion project in 2012.

Moving on to slide 11; adjusted EBITDA was $494 million for continuing operations in 2013, compared to $507 million in 2012, a decline of $13 million. In the North America EfW business, the same store revenue increase was more than offset by a $27 million increase in plant operating expenses. Our wages and benefits in plant operations grew a bit more than inflation last year, and we incurred some additional plant expenses that were tied to increases in revenue, such as steel and [indiscernible]costs. Overall, our revenue didn't quite keep up with costs, given the slightly lower energy and metal prices last year, along with overall waste price growth at less than inflation.

As Tony mentioned, plant maintenance was up $6 million on a comparable year-over-year basis, as the costs associated with unscheduled downtime, offset overall efficiency improvement in our maintenance activity.

Service fee contract transitions, negatively impacted adjusted EBITDA by $6 million, with an increase in plant operating expenses of $14 million, due to the transition to tip fee structures, more than offsetting the net increase in revenue that I mentioned a minute ago.

Transactions, which include the Delaware Valley Facility release buyout in late 2012, and the Camden EfW facility acquisition that we completed last year, offset by the loss of the Hartford operating contract in 2012, increased adjusted EBITDA by $9 million year-over-year.

The net decline in the other bucket of $6 million, primarily reflects lower construction profit in 2013, following the completion of the Honolulu expansion in 2012, partially offset by better profitability in our biomass operations.

Turning to slide 12; free cash flow was $245 million for continuing operations in 2013, compared to $277 million in 2012, a decline of $32 million. This was driven by the $13 million year-over-year decline in the adjusted EBITDA that I just discussed, $11 million of additional cash interest expense, primarily related to the refinancings that we completed in 2012, and a $7 million negative impact from non-construction related working capital.

Turning to slide 13; adjusted EPS for continuing operations was $0.38 in 2013, compared to $0.58 in 2012. The primary drivers for the decline in adjusted EPS were lower operating income, consistent with the decline in adjusted EBITDA; a higher effective book tax rate; an increased book interest expense year-over-year.

Now please turn to slide 14; to restate what Tony mentioned earlier, yesterday we announced the following 2014 guidance ranges. Adjusted EBITDA from $470 million to $500 million; free cash flow from $170 million to $210 million, and adjusted EPS from $0.35 to $0.50.

I'd like to note that this free cash flow guidance range is not directly comparable to prior or future periods, due to the significant expected movements in working capital related to our Durham York construction project. Excluding this construction working capital, which we estimate will reduce cash flow by approximately $40 million this year, free cash flow is expected to be in the range of $215 million to $245 million, which compares to $251 million in 2013 on an apples-to-apples basis. Note that we expect negative working capital to reverse in 2015.

Now let me spend a few minutes walking through the year-over-year drivers for our guidance ranges. As you can see on slide 15, there are a number of factors, both positive and negative, impacting our expectation for adjusted EBITDA this year. Overall, we expect our North American EfW business to be down $15 million to $35 million year-over-year, with biomass and our international operations making up for some of that decline.

On the negative side, within North America EfW, as discussed on previous calls, there were $15 million in one time benefits in 2013, that we don't get this year, including a PPA buyout and insurance recoveries. We also expect $10 million impact from the exploration of above market PPAs, which we previously mentioned; $10 million to $20 million of increased maintenance expense, which Tony discussed earlier in detail, and a $20 million to $25 million negative impact from service fee contract transitions, mainly due to lower debt service client billings at $20 million.

On the positive side, we expect metals revenue to increase by between $8 million and $16 million at expected 2014 prices. Excluding the expiration of above market PPAs, we expect energy sales to increase on a same-store basis by $10 million to $20 million, driven by both higher production and higher energy prices. We also realized additional EBITDA from the Camden acquisition, which is one of the factors included in the other bucket within North America EfW.

Outside of North America EfW, we expect some additional $10 million to $20 million of adjusted EBITDA year-over-year, driven by improved energy and record pricing at our main biomass facilities, and the benefit of some growth investments we made in China, to increase energy sales.

Moving on to free cash flow on slide 16; excluding construction of related working capital, the midpoint of our guidance range is down about $20 million compared to 2013. Again, using the guidance midpoints, this is driven by the $9 million decline from lower adjusted EBITDA, a $13 million increase in maintenance capital expenditures at our expected total range of $95 million to $105 million, and a $5 million increase in cash interest expense. We expect this to be partially offset by $5 million to $15 million of other cash flow, including distributions from the Delaware Valley Facility Trust account acquired in 2012 when we bought out the facility lease; and lower cash bonus payouts related to our 2013 performance.

On slide 17; the midpoint of our 2014 adjusted EPS guidance is up $0.05 versus 2013, primarily due to a lower projected effective tax rate, down from a little over 50%, to an estimated range in the mid to upper 40s, as well as higher equity income, primarily from China.

Now I will move on to our growth investments, please turn to slide 18; we provided a recap of our growth spend in 2013 and our anticipated growth investments for 2014. There are a few things that I want to highlight on this slide. First as you can see, we need $82 million in investments for organic growth in 2013, in line with $75 million to $100 million that we had anticipated at the start of the year. Half of that investment went into new metal recovery projects. You see the impact of these new metal systems in 2014 and beyond.

In 2014, we expect to spend $50 million to $75 million on additional organic growth initiatives. This includes commencing construction to upgrade the emissions control system at our Essex county facility, installing new metals recovery systems, and completing the project to increase steam sales at our Niagara facility. Remember, the Essex County project represents a $70 million to $90 million investment that will be spread over the next three years.

It may be difficult to see the benefit that these investments have generated over the past couple of years, but it has been significant. Tony already highlighted some of the numbers on the contribution from metals project in particular. Stepping back, we have gone through a multiyear period of meaningful mark-to-market adjustments on contract transitions, while keeping adjusted EBITDA largely steady. We expect the impact of contract transitions to lessen after 2014, but the organic growth investments have really helped to bridge this period.

In addition to the investments I just described, we expect to spend between $75 million and $100 million to prepare for our contract with New York City, which Tony mentioned earlier. It was a great contract, and we expect to earn an attractive return on our capital, while locking up close to 1 million tons of waste under a 20 year contract, displacing stock waste at two large merchant plants.

All in, we are planning to invest between $125 million and $175 million in 2014 in committed projects. To the extent that we secure new investment opportunities that meet all the current thresholds, we will revise this outlook as the year progresses.

Turning to slide 19, I will review the balance sheet. Net debt at December 31 was approximately $2 billion, with the net debt to adjusted EBITDA ratio of 4.1 times, up slightly from where it was a year ago. I believe that this is a comfortable level of leverage for the company, given our visibility on long term cash flows.

The company can certainly support higher leverage for a period of time, if the right strategic opportunity came along. But as to that [ph] we will look to keep leverage at approximately this level of below. We'd like to maintain our credit ratings in the BBB category over the long term and the leverage ratio in this zip code is consistent with that goal.

As you can see on this cap table, we have now paid off or refinanced the vast majority of our subsidiary level project debt, reducing net balance by almost $1 billion over the past six years. As we have done that, we have generally recapitalized at the corporate level, taking advantage of attractive capital market conditions.

Over the next year, we plan to access the capital markets to fund several of the growth investments that I mentioned, including the majority of the investment associated with the New York City contract, and the investment in our Essex facility. This will increase our leverage a bit in the near term, but these investments will generate earnings and cash flow over the long term, and we look at the balance sheet with that perspective.

In addition to fund the growth investments, we will need to refinance the $460 million of cash convertible notes that mature in June. We have several options for refinancing, and plan to address this in the first quarter. Although our specific plans have not been finalized, its my expectation that interest expense for the new debt will be higher than the current convertible, which is reflected in our guidance.

Moving on, let's turn to slide 20 to discuss shareholder returns and capital allocation. As you can see, we did not repurchase any stock in the second half of the year. Given the change in CFO, I think its appropriate to reiterate, that our capital allocation policy has not changed. We have always been consistent in communicating, that our share repurchase program will be executed with excess cash flow, if available, after making investments that we believe exceed our long term cost of capital. Given our outstanding commitments to our dividends and growth investments in 2013 and 2014, any additional share repurchases last year would have been funded with additional leverage. We, and our board, believe that this would not have been the right decision for maximizing long term shareholder value.

Based on our committed investments, we also did not plan any additional share repurchases in 2014. Of course, we are always assessing our capital allocation option, and will revisit this for 2015.

To close our remarks, I will restate that Covanta has a great business, with a great team of people. We provide an essential service with irreplaceable infrastructure assets and strong long term client relationships. That combination ensures that we will generate substantial and stable cash flow for many years to come. Personally, I am excited for 2014, and even more so, for our ability to create shareholder value over the long term.

Now let's move on to Q&A. Keith, would you open it up for questions, please?

Question-and-Answer Session

Operator

Yes. Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And the first question comes from Hamzah Mazari from Credit Suisse.

Hamzah Mazari - Credit Suisse

Good morning. Thank you. Just a first question on some of the organic growth investments. You highlighted how to think about maintenance expense, run rate going forward, may be if you could give us some color on how we should think about the outlook for these organic growth investments, specifically, they have ramped up since 2012? Are these going to be lumpy as we go forward, or is the current run rate, the 2014 run rate or the 2014 run rate, a good way to think about how these investments are going to roll through?

Anthony Orlando

Well, thanks Hamzah. Well a couple of things, this is Tony. We have two large projects that are committed, the New York City project, which totals about $140 million. The vast majority of that, as Brad laid out, will be spent -- we expect to spend this year, but some of that spending will roll into the following year as well, particularly as that contract has -- we have been released to proceed with one transfer station. There is another portion of the contract, and so that capital is likely to be the following year.

Then as Brad also mentioned, we have the Essex project, which is a large $70 million to $90 million investment that's going to spread out over three years. So we have a pretty good view into where those are going.

The other organic growth; frankly, we hope we find a lot of opportunities to invest in organic growth and get the kind of returns that we have gotten on our metal projects. But we will have to wait and see how that plays out. So we have laid it out -- our expectations for this year, I think, pretty clearly; and as we look beyond that, certainly the New York investment will be ramping down after this year. Right now, our metals projects are ramping down this year as well, and hopefully we will find other opportunities to get attractive returns.

Hamzah Mazari - Credit Suisse

Great. Very helpful. And just a follow-up question. Your folks have sort of bought some transfer stations, which make sense. You have been -- New York City, long term plan, that you have secured. Could you talk about your strategy, may be to get bigger in the transport business, given that New York City long term contract looks very logistics oriented, rather than, may be pure disposal. Any thoughts around that would be helpful. Thank you.

Anthony Orlando

The New York Contract is very logistic oriented, right? I mean, it's largely a process of moving the waste from New York City, out to our facilities. What's attractive to that contract though, obviously, is the fact that -- what we do well, is service municipal customers on a long term basis, and securing that predictable stream of waste and revenue, is obviously very attractive to us.

Now, we do a lot of transportation. We have got 18 transfer stations now. It's certainly something that we can do, and we think it really complements our EfW assets, particularly in light of the fact that we are not in the collection business. This essentially gives us a greater reach to -- in terms of, geographically, where we can draw waste from; and so to the extent we can do things like that, that enhances the value of our ESW assets, we are going to continue to look to do that.

Hamzah Mazari - Credit Suisse

Great. Thanks a lot.

Operator

Thank you. [Operator Instructions]. And the next question comes from Michael Hoffman from Wunderlich.

Michael Hoffman - Wunderlich Securities Inc.

Hi. Thank you very much for taking my question. I guess they are in two buckets; one, Fairfax. Its my understanding that the Fairfax solid waste authority is about to or has submitted a proposal to the Fairfax Board of Supervisors, and you confirm if that's in fact happening, and then remind us the mechanics of their process, once that Board of supervisors gets a proposal?

Anthony Orlando

Hi Michael, this is Tony. We are trying to really look at our business as a portfolio. I think the information that we have provided, helps you do that. We have certainly demonstrated a very good track record of extending contracts. We have been in discussions with our Fairfax client for quite some time. Our current contract with them runs through 2016, and we are optimistic that we will reach an agreement to extend that contract. But until that's done, I think its premature to discuss it.

Michael Hoffman - Wunderlich Securities Inc.

Okay. Just for your benefit, a person for Fairfax was at a conference recently, and stood up in front of an audience of about 100 people and said that they were doing this.

Anthony Orlando

No, I understand. As I said, we are certainly optimistic that we will reach agreement. But I just think its best to let those things play out, and as we have talked about, the contracts that got extended in the fourth quarter, I would hope to be able to talk about additional contracts getting extended some time during 2014.

Michael Hoffman - Wunderlich Securities Inc.

Okay. Second question on growth capital. Based on the way you described everything, and showed us all the pieces on page 18, am I concluding correctly that I can assume that growth capital comes down in 2015, and further in 2016, based on what we know today?

Anthony Orlando

Yes. If we don't secure new opportunities to invest, then it would wind down. Sure.

Michael Hoffman - Wunderlich Securities Inc.

All right.

Anthony Orlando

Hopefully, we do find new opportunities. But --

Michael Hoffman - Wunderlich Securities Inc.

I get that. But underlying assumption is, there is always going to some level of growth capital, but we are probably hitting a peak in 2014, trending down some in 2015, and then it will settle to a more lower, but ongoing level of activity. Is that an appropriate way to think about it?

Anthony Orlando

I mean, with the things that we have in hand, that's the profile. And I think that's probably, typically the case, as with any profile we think we have in hand or our near term, and then they start winding down. But a couple of big projects, with Essex and New York, no doubt. And we have gone through the bulk of, at least what today's technology would allow on metal. Maybe there will be some [indiscernible] technology down the road. But yes, that's the profile.

Michael Hoffman - Wunderlich Securities Inc.

Okay. Thank you for that help.

Operator

Thank you. And the next question comes from Dan Mannes with Avondale Partners.

Daniel Mannes - Avondale Partners

Thanks. Good morning everyone, and I wanted to give at least some appreciation for the enhanced disclosure on the 2014 revenue build up. I think it certainly helps us out a bunch, so, thanks for that.

Brad Helgeson

Same here.

Daniel Mannes - Avondale Partners

The downside with giving us more disclosures, if you give us an inch, we take a mile. So what I am going to do actually is ask a little bit, if you can may be give us a little bit more color on 2015 and 2016. That's something you certainly talked about last year at this time, is how to think through, may be, some of the puts and takes. You gave us a little bit more in power, but maybe can you walk us through, may be in a little more detail, the way you see fee transitions and may be the impact of New York a little bit, as we think about the longer term picture here?

Brad Helgeson

Let me take a shot at that Dan. I think, I can summarize information that we have provided before, as well as during this call, and hopefully that will help to give you a picture. I think the way I would describe it is, we have got a very stable business profile, and that our financial performance is most likely to be driven by changes in market price over time. To be clear with respect to the contracts and contract transitions relating to the existing business, we also see a great deal of stability going forward.

As with any portfolio, some things are going to work for us, some things are going to work against us. Of course, we are going to continue to pursue organic growth and you know, answering the last call with Michael, we are hopeful we will continue to find ways to invest in organic growth and drive some revenue there, as well as looking for efficiency gains.

Regarding waste, New York City, certainly begins to add value in 2015. I would say, it would take some time to get the full benefit of that. Remember, its not a full year, and its only one of the stations to start, its going to take some time to ramp that up. Going the other way, in 2015, I have noted that we have got some above market tip fee contracts that are rolling over this year and next.

As for the service fees, which I know are probably the most complex to understand, once you get past 2014, and clearly, subject to a lot of variables, so this is not -- you can't just predict exactly what's going to happen. But recognizing there is variability, I think its very consistent with our stable business profile. In other words, service fee contract is net neutral over the remaining several years of the transaction. Some years we may have up, some years we may have down. And we have talked about, historically, that 2015 was a neutral year.

Regarding energy, we have laid it out in the prepared remarks, and its really going to be a function of what happens in the market. Current forward curves, which suggest 2015 prices will be lower than 2014. That would obviously not be helpful, but we don't know where that will go. I do think that probably the biggest impact on pricing, is going to be felt at the biomass facility, not as much as the waste energy facility.

Then metals, is going to be a function market, and we have laid out our volume expectations, so that you can take your view on that. So what we have tried to do here, is provide you with the information, recognizing that the market is going to have a big influence, but that overall, we have a very-very stable business profile, and we tried to give you the information, so that you can kind of take your own view on that.

Daniel Mannes - Avondale Partners

I mean, if I can just counter that, I would actually say that's kind of a change from what we have seen in the last few years. Whereas, you look backward over the last three years or so. It has really been, you guys almost fighting an uphill battle, or each year you are spending money on organic growth to offset the contract transitions. I mean, having the market be the decider, more so than, just kind of stepping [indiscernible], I think is actually kind of a different story, versus what you say. So I guess, I interpreted a little bit differently, than the way you opened your statement?

Anthony Orlando

Well, as Brad said, we have gone through the vast majority of the transitions, right. So there is no -- and this year certainly being a meaningful year with prospective transitions. So we are starting to wind down on service agreement transitions, and as those have transitioned, we have more and more market exposure. So I think we have been going through that transition, and I think your characterization is fair. We have gone through the bulk of it, and now we have got a very stable business outlook, with a bigger exposure to markets.

Daniel Mannes - Avondale Partners

Got it. Thanks a lot.

Operator

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

Gregg Orill - Barclays Capital

Thank you. Appreciate the additional disclosures.

Anthony Orlando

Good morning.

Gregg Orill - Barclays Capital

I wanted to come back to your comment about the mix of contracts, beyond 2020. Those that expire beyond 2020, those have an average power price in them that is higher than the ones that expire before that, which I think you said is around 57?

Anthony Orlando

Yes. So those contracts that are expiring this decade, have an average price of 57.

Gregg Orill - Barclays Capital

And so, out of the 3 terawatt hours of contracted, would that apply to may be half of that?

Anthony Orlando

Yes. Yes. Its roughly half. Its this decade and half is after 2020.

Gregg Orill - Barclays Capital

Okay. And so you had a market indication of about $45 to $50 a megawatt hour on slide 22. Would it be reasonable to say, you'd be at the lower end of that range, if you compare what those contracts would be at market?

Anthony Orlando

Well, again, I think what we have tried to do, and I think hopefully successfully. We are looking at 58 or 57 rather, average price of our contracts over the next remaining part of this decade, versus whatever the market will be, which you can take your own view on where the market is going to go.

Gregg Orill - Barclays Capital

Yes. Thank you.

Anthony Orlando

Okay. Great.

Brad Helgeson

Thanks Gregg.

Operator

Thank you. And the next question comes from Scott Levine with Imperial Capital.

Scott Levine - Imperial Capital

Hey, good morning guys.

Anthony Orlando

Good morning Scott.

Scott Levine - Imperial Capital

Quick question on the maintenance expense, and the update there. Certainly sounds like the things you are doing are logical, and condition to expect 2014 will be the go forward run rate. But just, may be a little more color regarding, how you plan to assess the success of the stepped-up investment program in that area, and whether there's any possibility after a couple of years, maybe you determine you don't need as much spend or maybe you need more -- maybe a little bit more color regarding the thought process behind the new investment program, how you expect to monitor success going forward?

Anthony Orlando

Sure. I think the key really for us will be to optimize, both for Covanta and our shareholders, and as well for our clients, the facility production levels. And we have had a great track record with 92% boiler availability and our goal is going to be to maintain that for the long term. Last year, our availability on the turbine generators, was not where we wanted to be. We want to get that availability on the turbine generators back up into the mid high 90s. So certainly, that overall availability of those two key revenue components, will be how we will look at the success of the program.

There will always be some unscheduled downtime and there will always be scheduled downtime. That's the nature of operating a very complex fleet. We have got 120 blows [ph] and 50 some odd, turbine generators. So the key is, maintaining high availability across that fleet.

Scott Levine - Imperial Capital

Got it. One follow-up on the, maybe on the capital structure and dividends. It sounds like you know, repurchase off the table, investing in the growth CapEx in New York City and otherwise. If you could update us your thoughts on the dividend, current debt levels, and the timing of an announcement, they are typically, I think in the first quarter, or certainly after the annual meeting, but are there?

Brad Helgeson

Yeah sure. Hey Scott, its Brad. As I mentioned in the prepared remarks, we feel comfortable where our leverage is right now, plus/minus, and as I also said, we would potentially have a role in this to increase leverage for the right opportunity. But we are not looking to increase leverage, to be returning capital to shareholders. We'd like that to be out of the cash flow that we generate over time. We think that's the right answer for the long term.

As far as the dividends, our historical practice, as you point out, is to announce any dividend increase in the first quarter. So we are not committing to that, one way or the other, but that has been our historical practice.

Scott Levine - Imperial Capital

Understood. Thanks.

Operator

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

Carter Driscoll - Ascendiant Capital

Good morning gentlemen. Just to follow-up on the maintenance -- how are you doing? On the maintenance discussion, in terms of your new practice. Can you talk about the duration of what you consider a minor outage, and then the decision point at which it would become more of a longer term fix, and the duration of what that typically is just, vis-à-vis, each other? And then maybe the number of facilities you are targeting this year, for the new program?

Anthony Orlando

Sure. Let me take the major first. So a major outage, usually takes about three weeks. Depending on the work, could be three to four weeks. So a fairly significant period of time, that would include an overhaul of both turbine and the generator.

On the other hand, the minor outage would be scheduled only for a few days. Generally speaking, to inspect the equipment; things that you cannot inspect, while it is operating. So you have shut the machine down, do some inspection, as you might have some minor repairs. And then to the extent, if you do see something during the minor outage, of course, we would take care of those repairs, which would then extend the minor outage, if necessary. But as I mentioned, we have included, what we believe, to be a reasonable assumption on some work that we will determine to be necessary after we do the inspections.

Our fleet of turbines is roughly 55, and again, on the majors, we would typically do those once every seven years. So we are having a pretty normal year, between seven and 10 major outages. The big difference this year, is that, we have got 25 or maybe almost 30% of the fleet, that we are going to be taking down for the minor inspections.

Carter Driscoll - Ascendiant Capital

That's helpful. Then maybe just to follow-up, switching gears. Can you talk about -- one of your growth initiatives, obviously special waste. Can you talk about the types of special waste you think are the opportunities, versus the ones that you don't believe are some -- maybe adjacent movements, that you could or could not move into, I think, just specifically would be helpful?

Anthony Orlando

Sure. Our special waste is probably different from some of the other company's special waste. We have a number of different categories. The one that I think we are really pushing hard and seeking to grow, would be what we would characterize as a sustainable solution, where our customers want to avoid going to a landfill [ph] because its environmentally preferable to come to an energy from waste facility or the recycler, to do something else. And so for those customers that are willing to pay a premium for that premium service, that's certainly an area that we are looking to grow, and that cuts across a lot of businesses.

The more traditional special waste for us would be, what we would consider assured disruption. Somebody wants to make sure that, may be if their product is off spec, that it is destroying, or may be its confidential documents or whatever. So nice base steady business, and we expect that to continue its growth trajectory. And then some of the more challenging ways, non-hazardous industrial waste, that may be are difficult to handle, and we are looking to continue growing that. One of the things we did this past year, is that we extended our receiving and handling capabilities at two of our larger facilities, so we can more quickly and efficiently process waste for our customers, and continue to grow.

So we feel [indiscernible] last year, we were about 16% growth, and we are targeting double digit growth there, again this year.

Carter Driscoll - Ascendiant Capital

Great. Thanks gentlemen.

Operator

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

Barbara Noverini - Morningstar

Good morning everybody.

Anthony Orlando

Good morning.

Barbara Noverini - Morningstar

Brad, you mentioned increased fuel and hauling costs and plant operating expenses this year. Going forward, many of your contract expenses appear to include additional services, for which you will require third party operators presumably. Tony, I know you mentioned that you are not in the collection business, but is it reasonable to expect that plant operating expenses will continue to tick up as a percentage of revenues going forward, due to these increasing subcontractor and third party costs, for hauling or additional services?

Brad Helgeson

Yeah. Hey Barbara, it's Brad. Yes, that is a reasonable expectation. One of the variables that can change, when we transition a contract from a service fee to a tip fee, is operating costs. Obviously there is the share of energy revenue, metals revenue, the waste price, the debt service, but also operating costs, and when the contracts transition to tip fee, there will be additional costs that we would be responsible for.

Hauling is actually a great example, it's probably the biggest single one, where typically, we are not responsible for the ash disposal and ash related ash hauling, whereas post transition, we would be. So that is definitely a true statement.

Barbara Noverini - Morningstar

Okay. Just quickly, I think just so you know, there are a couple, maybe 100 basis points in our margin. How much of that, do you think, was attributed to those costs, versus other things that were going on in the year?

Brad Helgeson

Well the -- I guess, I will make a little distinction, and we have kind of broken out that the year-over-year, within the Energy from Waste business this way, intentionally, where we split out the service fee contract impacts from, what we refer to as same store. So the increase in comps related to the service fee contracts this year, was $14 million, last year rather, 2013. So the other increase within same store was actually not related to contract transition specifically. As I mentioned briefly in the prepared remarks, we did see some increased fuel and hauling costs, related to revenue generating services. In the case of fuel, we had to use some auxiliary fuel to meet energy demand in a couple of situations, and on the hauling side, we are providing some services for waste hauling and then subcontracting the waste transport, not collection. And then subcontracting the haul and associating with that. So along the same lines, I think -- the way you're thinking about it.

Barbara Noverini - Morningstar

Okay got it. No, that's helpful. Thanks very much.

Operator

Thank you. And the next question comes from JinMing Liu from Ardour Capital.

JinMing Liu - Ardour Capital

Thank you. Thanks for taking my question. First is a follow-up on the special waste. Are you guys thinking about expanding that business into other areas of the waste management, like medical waste?

Anthony Orlando

Our focus is to optimize the value of our existing assets. We do actually handle very small amounts of medical waste today, but I don't think that's necessarily a target for us going forward.

JinMing Liu - Ardour Capital

Okay. Second question, if I remember correctly, you guys have [indiscernible] about $200 million cash offshore. Do you have plan to move those money to support your growth?

Brad Helgeson

Hey JinMing, it's Brad. What we have done with cash that's offshore, is to the extent that we can bring it back, without incurring U.S. tax, then we will do that and we have done that. We actually brought back some additional cash this year, $25 million. The remaining cash, that remains offshore, our hope is that we will have that, essentially to cover our equity investment into the Dublin project, and pending final determination of whether that project is going forward or not, we will keep it there, and then depending on where that goes, we will take appropriate steps.

Anthony Orlando

We also have a couple little smaller opportunities that we are looking at in China as well, so there could be opportunities to invest there too.

JinMing Liu - Ardour Capital

Okay. Got that. Thanks.

Operator

Thank you. The next question is a follow-up from Michael Hoffman from Wunderlich.

Michael Hoffman - Wunderlich Securities Inc.

Thank you. So following on my question with regards to trend lines of growth capital, and again I am asking if, the logic of my thinking holds. If energy, tip fees, and metals prices were to be, where they are today? And I think, forward out of 2014, and I go 2015 and 2016, less contract transitions, you get our normal contract escalations? You get the probability of a favorable outcome, however -- but it plays out, but a favorable outcome out of Fairfax. The direction is favorable? Meaning, rising. 2014 should improve into 2015, should improve into 2016? Is my thinking correct on that?

Anthony Orlando

Well certainly, that's our goal. A lot of factors are going to play into that, and again, I think we are really focused on making sure we hit the numbers this year and doing the things this year that will create long term value and stable and strong cash flow. Certainly, that's our goal.

Michael Hoffman - Wunderlich Securities Inc.

Okay. So that ties into the next question. So just taking the $82 million alone last year, how do I think about a payback period? Is this a three and four year? So as I translate that, $82 million turns into XYZ incremental EBITDA contribution?

Brad Helgeson

If I understand your question correctly, I think the way to think about -- if you are referring to the growth investment in 2013. Certainly, the metals investment that we made in 2013 is essentially embedded in our 2014 guidance for metals revenue. The investments that we have been making in Niagara last year and this year for increased energy sales, will hopefully see a little bit impact this year, and then some impact next year and beyond. That's also embedded in the long term energy guidance that we have in the back of the [indiscernible] presentation.

The Essex piece is the one that is a little bit harder to define. The reason is, that the installation of the emission control system was really part of the overall package, when we renegotiated the contract with Essex County, and extended to Wakefield. So that also is essentially embedded in the run rate EBITDA that you see today.

Michael Hoffman - Wunderlich Securities Inc.

Okay. Thank you.

Operator

Thank you. And next question comes from Al Kaschalk with Wedbush Securities.

Albert Kaschalk - Wedbush Securities

Good morning. Tony, I just wanted to follow-up. In terms of the growth prospects, and specifically outside of North America, you mentioned China. Can you talk about the environment there, in terms of prospecting and the bidding environment? Like a year or two ago, it was actually improved. But, maybe just give us an update on that opportunity, and I realize it's not a 2014 story, but --?

Anthony Orlando

Yeah, and again its not our focus, but it is -- it has been a good investment. Thus far we have got a joint venture partnership there, which includes three operating facilities. In two cases, we are a minority partner, in one we are a majority partner. We have been fairly cautious there. The environment is very good, in terms of the regulatory support. There is a fixed feeding tariff for Energy from Waste facilities, to RMB650 a ton -- a megawatt rather. So very attractive energy prices; very low construction costs; very low tip fees. But the nature of the competitive environment, and the returns that are available, we have been moving relatively cautiously. But if we do see opportunities, particularly to the extent we can do something, or maybe we expand off of one of our existing operations, we will continue to look at those.

But for the most part, we are kind of playing -- reinvesting the money that we are generating there, and seeing where that market kind of plays out over the long term, still quite a number of different players in the market, and whether or not that creates some opportunities down the road, we will just have to wait and see.

Albert Kaschalk - Wedbush Securities

Okay. And then finally, can you update us or just comment on the strategic plans to monetize the $200 million or so of cash sitting on the balance sheet, that I think is -- for a lack of better word, suspended on the international markets, and how we should think about that?

Brad Helgeson

As I mentioned a minute ago, the hope is that that cash that's offshore currently, will be invested in the Dublin project. We will see how that plays out. As Tony mentioned also, to the extent that doesn't move forward. We certainly have, as incremental investment opportunities that we hope to, in China. So it could be used there. And then, we are -- in parallel with that, we are constantly assessing ways that we can bring some of that cash back to the U.S. in a tax efficient manner. The biggest variable here of course would be Dublin, and then in the event that Dublin does not end up moving forward, which we hope, obviously is not the case, we will have to assess our options at that point.

Albert Kaschalk - Wedbush Securities

Okay. Sorry I missed the comments early. But there are complicated tax structures that could allow you to get that back to the U.S., should Dublin not materialize or other large growth projects internationally. Is that a fair comment?

Brad Helgeson

I think it would be premature for me to comment specifically, one way or the other. We will try and handle it in the most efficient way possible. There isn't a -- I could tell you, there isn't an obvious solution for all of us, because if there were, we would have brought it back already. So I think we will cross that bridge when we get to it, in terms of what we are going to talk about.

Albert Kaschalk - Wedbush Securities

Thanks for all the detail.

Operator

Thank you. At this time, I would like to turn the call back over to management for any closing comments?

Anthony Orlando

All right. Well thank you everybody, and we are looking forward to having a good year in 2014 and talk to you on the next call. Take care.

Operator

Thank you. This conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Have a nice day.

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