Covanta's (CVA) CEO Tony Orlando on Q2 2014 Results - Earnings Call Transcript

Jul.23.14 | About: Covanta Holding (CVA)

Covanta Holding Corporation (NYSE:CVA)

Q2 2014 Results Earnings Conference Call

July 23, 2014 8:30 AM ET

Executives

Alan Katz - Vice President, Investor Relations

Tony Orlando - President and CEO

Brad Helgeson - Chief Financial Officer

Analysts

Derek Sbronga - Macquarie

Dan Mannes - Avondale

Flavio Campos - Credit Suisse

Charles Redding - BB&T Capital Markets

Scott Levine - Imperial Capital

Michael Hoffman - Stifel

Gregg Orill - Barclays

Al Kaschalk - Wedbush Securities

Barbara Noverini - Morningstar

JinMing Liu - Ardour Capital

Operator

Good morning, everyone. And welcome to the Covanta Holding Corporation's Second Quarter 2014 Financial Results Conference Call and Webcast. This call is being taped and replay will be available to listen to later this morning. For the replay, please call 1 (877) 344-7529 and use the replay conference ID number 10048987, again, 10048987. Webcast as well as the transcript will also be archived at www.covanta.com.

All participants will be in listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (Operator Instructions)

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

Alan Katz

Thank you, and good morning. Welcome to Covanta's second quarter 2014 conference call. Joining me on the call today will be Tony Orlando, our President and CEO; and Brad Helgeson, our CFO. 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 our website. The prepared remarks should be listened to in conjunction with these slides.

Now on to the Safe Harbor and other preliminary notes; the following discussion may contain forward-looking statements, and our actual results may differ materially from those expectations. Information regarding factors that could cause such differences can be found in the company's reports and registration statements filed with the SEC.

The content of this conference call contains time-sensitive, information that is only accurate as of the date of this live broadcast, July 23, 2014. We do not assume any obligation to update our forward-looking information, unless required by law. Any redistribution, retransmission or rebroadcast of this call, in any form, without the expressed written consent of Covanta, is prohibited.

The information presented includes non-GAAP financial measures, because these measures are not calculated in accordance with U.S. GAAP, they should not be considered in isolation from our financial statements, prepared in accordance with GAAP.

For more information regarding definition of our non-GAAP measures and how to use them, as well as limitation as to their usefulness for comparative purposes see our press release which was issued last night and was furnished to the Securities and Exchange Commission on Form 8-K.

With that, I'd like to turn the call over to our President and CEO, Tony Orlando. Tony?

Tony Orlando

Thanks, Alan, and good morning, everyone. Please turn to slide three in the web deck. The business performed well on all fronts during the quarter. This keeps us on track for the full year and we affirmed our 2014 guidance for all metrics.

A couple of noteworthy results during the quarter, our investment to increase metal recovery is really kicking in. We achieved our best ever metal revenue this quarter $25 million. Our maintenance expense this quarter was lower than we had anticipated. I will cover the reasons for this shortly.

Before moving on I want to repeat a couple of important announcements we made a few weeks ago. First, we announced the companywide cost savings initiative that we expect to deliver proximately $30 million of EBITDA benefit beginning next year. We also announced our intention to raise our annual dividend to $1 per share starting with the dividend that we will declare in September.

Now, let’s discuss performance in the market. If you turn to slide four, let me start by addressing some developments with key waste contracts. Together with our Indianapolis client we announced to plan to build an advanced recycling center, which will increase the city’s recycling fivefold.

We will retain most of the revenue from selling the recycled material. The agreement to build the recycling center also calls for existing contract within Indianapolis to be extended 10 years to 2028.

We hope the agreement will be finalized in the coming weeks, which would allow us to move forward with the mutually beneficial project. Our investment would be approximately $45 million and will take about 18 months to build after we receive all the permits. If all goes as planned, the advance recycling center will come online in 2016.

We also signed a contract with the City of Boston this past quarter. This was a competitive bid process and the new agreement calls for us to take approximately 140,000 tons of waste annually from the city.

While this is officially a new contract, it replaces an expiring contract that we had with Boston for approximately the same volume. As anticipated, the competitive dynamics in the market require that we reduced price to win the bid.

Finally, we extended our York operating contract by five years to 2020. There is not much else going on with respect waste revenue. Results were in line with our expectations, which Brad will review momentarily and the markets remained pretty stable.

The one item I want to mention is our special waste revenue. We set targets to continue growing this business at 10 plus percent. Half way through the year, I am pleased to say we're on track to achieve our objective.

Let’s move on to Energy, please turn to slide five. Again, results were in line with our expectations. On a same store basis, revenue from both price and volume increased. Revenue also increased as a result of the Camden acquisition and as anticipated revenue growth was partially offset by certain power purchase agreements that transitioned to market.

While market prices were in line with our expectations for the second quarter, in the last few weeks, there's been a noticeable dip in the forward curve. This is due to the relatively cool summer and significant natural gas production, which has resulted in gas storage recovering from the cold winter depletion faster than previously anticipated.

Notwithstanding this dip, since we only have about 0.5 million megawatt hours expose for the remainder of this year, we still expect to be within the revenue range we previously provided.

To reflect our recent hedging activity, we've updated our five-year forecast for energy production and market exposure on slide 18, so that you can take your own view on long-term energy markets.

Now let’s move on to metals on slide six. As mentioned previously, we achieved metal revenue of $25 million this quarter, a record for Covanta. This was a 47% year-over-year increase, a clear indication that our past investments are adding value.

Year-over-year, ferrous tons were up 13%, while non-ferrous tons were up 60%. Pricing for both ferrous and non-ferrous was higher compared with the second quarter of 2013 as a result of both market movements and the fact that we continue to recover higher quality products, which command the higher price.

With ferrous prices remaining strong, we increased our full-year outlook a bit, but we also narrowed the volume range to the lower end. We held the outlook unchanged for non-ferrous price and volume, combined metal revenue is right on track.

Please turn to slide seven to review maintenance spending. We are half way through the year and as it’s typically the case we have completed more than half of our scheduled maintenance activity to ensure that our plants continue running well.

During our previous quarterly call, we told you that we expected maintenance expense for the quarter would come in higher than last year. The actual results came in better than we expected for a couple of reasons.

First, we’ve completed about two-thirds of our planned annual turbine maintenance and its going well. Our proactive turbine generator inspections to date have resulted in less additional work than we had originally anticipated and our major turbine outages are going smoothly too.

Second, the benefit was just timing. We had some outage work plan for the second quarter, which we have rescheduled to the second half of the year. We did this for several reasons.

For example, at our Niagara facility, we postponed a routine boiler outage until after our new steam package boiler was online. Now when we conduct a routine outage later this year, our package boiler can satisfy the demand from our new steam customer.

On a full-year basis our expectation for energy from waste maintenance spend is unchanged. But it’s fair to say that if the second half goes as well as the first half did, particularly with respect to turbines then we will have a good chance to come in a little below the $230 million to $240 million estimate. I should also note, we did bump up the other maintenance CapEx $5 million to account for some incremental spending that is part of our cost savings initiative.

Turning to slide eight, I'll provide a quick review of our outlook before turning it over to Brad. It was a solid first half of the year and we affirmed our 2014 guidance. Our current full-year outlook for waste, energy and metal revenue is consistent with our original outlook. Our proactive maintenance program is going well and annual maintenance spend is trending favorably.

We remained focused on optimizing and enhancing our core EFW portfolio, running the business well and providing clients with excellent service. As we strive for continuous improvement at all of our existing operations, we are also looking forward to commencing service for two important new customers.

Our construction team is nearing completion of the Durham energy from waste facility in Canada. This will be a showcase facility and we are excited to see start-up on the way. Before long this facility will begin converting waste into clean energy for the first time and full operations will commence by year-end.

We are also making good progress on the New York City contract, equipment delivery is progressing nicely and all of our key contractors are gearing up. The city should begin delivering waste to the marine transfer stations during the first quarter of 2015 and we expect to ramp up service throughout next year.

Another major priority is a successful implementation of our cost savings initiative that we described in detail a few weeks ago. We remained confident in our ability to deliver approximately $30 million of EBITDA benefit next year.

We also have a few near-term growth opportunities that we’re pursuing. First, the advance recycling center that I mentioned earlier, it is an exciting opportunity to make a modest investment in new technology that will create value for our client community and for Covanta.

Regarding Dublin, as we said in June, we’re fully engaged and working with our clients to accomplish everything required to began construction. We should be able to provide some additional clarity within the next two months.

In conclusion, the year is off to a good start and we are working hard to finish strong. Furthermore, we have a number of initiatives that we are vigorously pursuing to increase long-term shareholder value. We remained confident in our cash generation, which we once again demonstrated by announcing that we will increase our annual dividend to $1 per share.

And now, I will turn it over to Brad for his prepared remarks.

Brad Helgeson

Thanks, Tony. Good morning, everyone. I will begin my review of our financial performance in the quarter with revenue on slide 10. Revenue in the second quarter was $432 million, up $21 million from $411 million in Q2 of last year.

North America energy from waste revenue was up $13 million year-over-year on a same store basis driven by $7 million increase in energy revenue from both higher generation and prices and a $6 million increase in recycled metal revenue from both higher volume and price, which was largely driven by additional investments over the past year to enhance metal recovery and quality.

Waste and service revenues were flat on the same store bases. Overall waste pricing was up about 2% year-over-year driven by contract escalation and especially continued growth in higher price special waste.

However, while waste tons processed were essentially flat in the quarter, we process the relatively higher mix of service fee tons versus tip fee tons, which impacted revenue on a year-over-year basis.

Contract transitions were net negative $7 million year-over-year, which included a $4 million decline in debt service revenue and a $3 million decline as a result of PPA explorations. The acquisition of our Camden facility contributed $6 million to revenue in the quarter.

Outside of North America EfW operations, construction revenue was lower by $2 million year-over-year. While all other operations were up $11 million, primarily due to the New Jersey transfer stations that we acquired at the end of last year and higher international revenue.

Moving on to slide 11, adjusted EBITDA was $121 million in the quarter, compared to $124 million in 2013. In the North America EfW business, we saw year-over-year increase of $10 million on a same store bases, driven by the revenue increase of $13 million, which was partially offset by slightly higher plant operating expenses.

This increase in expenses versus the prior year period was primarily driven by $3 million insurance recovering that benefited reported expenses last year. Otherwise, same-store plant operating expenses would have been flat.

In terms of maintenance, as Tony described, we had a very good quarter and our plant maintenance spend was actually down $1 million, compared to the second quarter of last year on a same store basis.

Contract transitions in the North America EfW business negatively impacted adjusted EBITDA by $30 million in the quarter. This consisted of $2 million decline in debt service billings year-over-year, a $3 million mark-to-market decline in energy pricing falling PPA explorations and an $ 8 million gain that benefited Q2 last year as a result of the PPA buyout in New England.

Excluding 2013 one-time items that I discussed, the PPA buyout and the insurance recovery, adjusted EBITDA in the quarter would have increased by $8 million on a year-over -year bases.

An additional note on the one-time items, we have mentioned at the start of the year that we benefited from about $15 million in one-time items in 2013, which would impact the year-over-year comparison in 2014.

Through the second quarter, we’ve now pass the anniversary on the majority of these items. We have remaining $3 million of 2013 non-recurring benefit that will impact the year-over-year comparison in the third quarter.

The impact from acquisition was net neutral in the quarter as we had planned major maintenance outage at the recently acquired Camden facility. The contribution from other non-EfW operations was also flat year-over-year.

Within that category the biomass plants operated well during the quarter. However, they were flat on an adjusted EBITDA basis year-over-year due to the benefit of the retroactive contract pricing adjustment at one of the California facility in Q2 of 2013.

Turning to slide 12, free cash flow was $15 million in the quarter, compared to $23 million in the comparable period last year. In addition to the small decline in adjusted EBITDA, we had $11 million negative impact from construction working capital and $6 million of additional maintenance CapEx year-over-year. These items were partially offset buy an improvement in other working capital.

As I said on our last earnings call, we would expect the construction working capital to be a larger negative impact this quarter resulting in negative overall free cash for the quarter.

But the timing of construction payments ended up a little deferent than forecasted which obviously benefited free cash. However, we still expect construction working capital to have a negative impact of $35 million to $45 million on full year results, which as we said before will reverse in 2015.

Turning to slide 13, adjusted EPS was $0.06 in Q2 compared to $0.12 in the second quarter of 2013. This was driven by lower operating income, higher interest expense following our refinancings in the first quarter and our higher effective tax rate as compared to last year.

Now we will move on to our growth investments, please turn to slide 14. We invested an additional $10 million for equipment and facility upgrades related to our New York City contract this quarter, bringing the total invested so far this year to $38 million.

We also invested $8 million in various other organic growth projects, including metal recovery systems, the installation of the natural gas package boiler at our Niagara facility and prep work for the new Essex emission control system.

Our outlook for growth investment for the full year is unchanged. We plan to invest a $125 million to $175 million and identify growth opportunities, including $75 million to $100 million for the New York contract this year. I should note that this total expected investment is not yet include the planned advanced recycling center at our Indianapolis facility which has been announced but still requires final contract approval.

Turning to slide 15, I'll review our current debt structure. We saw a couple of changes in the quarter. We use the proceeds from senior unsecured notes that we issued in the first quarter, as well as some of revolver capacity to payoff the $460 million of cash convertible notes that matured on June 1st of this year.

The convertible notes matured in the money for the noteholders. However, the notes converted all in the cash, not shared and the excess paid above the $460 million face value was covered by our bond hedge. For these notes repaid, the non-cash convertible debt expense in our P&L every quarter is now gone.

The chart on the slide presents our outstanding debt at June 30. From the credit standpoint our net debt to adjusted EBITDA ratio stood 3.9 times at quarter end and we had $455 million of remaining availability under our revolver.

In summary, the business has continued to perform in line with our expectation. Therefore, we reaffirmed our full year guidance for each of our key metrics. 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.

As Tony highlighted, we remained focus on the levers that we have to increase shareholder value, including our cost savings initiatives and growth opportunity and of course, operating the business to generate cash and provide world-class service.

We now plan to increase our dividend to $1 a share on an annualized basis underscores our confidence in the business and its ability to grow cash flow sustainably over the long-term.

That concludes our prepared remarks and with that we will open it up for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Derek Sbronga of Macquarie. Please go ahead.

Derek Sbronga - Macquarie

Hey. Good morning, guys. Thanks for taking my question.

Tony Orlando

Good morning.

Derek Sbronga - Macquarie

First question is on the longer term energy outlook slide, if I look for 2015, it looks like you have only hedged an additional 100,000 megawatt hours through the first half of the year? Can -- you maybe talk about whether this is strategic decision based on your view of energy prices or maybe why you haven’t hedged more of that year-to-date?

Tony Orlando

No. Nothing really change in our strategic outlook there, we continue to hedge periodically and we will probably enter next year with a similar level, I think it is around 1.2 million or so that we entered this year and we will probably end up about the same place by the time we get to the beginning of next year.

Derek Sbronga - Macquarie

Got it. So if you’re targeting, we should expect to see an increase in hedge through the back half of the year, is that fair?

Tony Orlando

Yeah.

Brad Helgeson

Yeah. Yeah. That’s fair. Derek, another item to note is the fact that we hedge based a statistical analysis of expected revenue at risk and so it’s not necessarily any given period a linear process of layering on the hedges.

Derek Sbronga - Macquarie

Got it. Okay. That’s helpful. And then maybe just one more on a capital allocation standpoint, following the dividend increase, if I kind of look at your adjusted available free cash flow number, it looks like your -- with the new dividend you are going paying out about 50% of that? Can you maybe talk about the longer term potential for the dividend payout ratio as you get through some these growth projects like New York City and potentially Durham as well?

Tony Orlando

Sure. Well, for the balance of this year given what we have on our plate from a growth investment standpoint. We will actually end up spending between the dividend and the growth investment more than our free cash generated in the period, which given our balance sheet is not necessarily a concern, but just to clarify that.

Over the long-term we’ve settled on what we expect to be as we talk about we announced the dividend in June, we settled on what we expect to be about 50% of our ongoing sustainable cash flow, which we hope to grow overtime. As far as overtime, we may revisit that percentage of free cash flow. We certainly have no intention of doing so now and we look to grow the dividend on the basis of growing cash flow.

Derek Sbronga - Macquarie

Got it. Okay. I will turn it over. Thanks very much

Tony Orlando

Thanks you.

Operator

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

Dan Mannes - Avondale

Thanks. Good morning everybody and nice quarter.

Brad Helgeson

Thanks Dan.

Tony Orlando

Good morning.

Dan Mannes - Avondale

So first question, as I look through the first half of the year, you’re up about $22 million in EBITDA versus what you did last year. Your guidance for this year 470 to 500, the high end of that is kind of what you did last year. So I guess, I’m trying to figure out as I look to the high end of the guidance range, what are the puts and takes because clearly you're implying that you're probably got about $22 million year-over-year headwind in the second half. Could you maybe walk us through some of the puts and takes that gets us there or maybe, what may be some of the conservativism is there -- is in your guidance?

Tony Orlando

I guess, I’ll take a shot at that Brad. And you can fill in where I’m missing. But you look we did certainly have a solid first half of the year. We’re pleased with it. As we mentioned, some of the maintenance was just simply related to timing. We’ve talked about energy prices coming down, I mean, obviously in the first quarter, in particular, we got nice benefit from the real higher energy prices. But just in the last few weeks we’ve seen a dip in the forwards curve. So certainly we’re going to feel that in the second half.

We also got the benefit in the first half this year of kind of a -- on a year-over-year basis, the benefit of the Camden acquisition. That was closed in the summer of last year. So we won’t get the kind of uptick on that on the second half of the year, so number of things. And as we’ve talked about it looked as we were halfway through the year. We got a lot of work left to do, a number of things that we want to accomplish and we feel very good about where we are in the guidance range but we still have a lot of work to do.

Dan Mannes - Avondale

Okay. And then one quick follow-up on Dublin, I mean, obviously you sought it out through big gating item which was the EU approval. Can you maybe talk to us about making the some of the contractual requirements or what’s currently required for you able to take the next step here?

Brad Helgeson

Yeah. This is Brad. We’re not going to get into the details of everything that needs to get done. I think you characterized it correctly that the EU decision was really a binary issue and was an obstacle to the project. With that removed, we certainly don't see anything on our list of remaining to dos that are really that significant. It’s is really -- from here on in, it’s whether it’s contractually or in terms of pulling together the financing, it’s the typical items that you would need to finish up before commencing construction on what would be a major infrastructure project for (indiscernible).

Dan Mannes - Avondale

Okay. Thank you very much.

Operator

The next question comes from Flavio Campos of Credit Suisse. Please go ahead.

Flavio Campos - Credit Suisse

Hi guys. Thanks for taking my questions. Just had a quick question on some color on the non-EfW North American revenue that jumped quite a lot this quarter, magnitude almost as large as the metals revenue jump. But it had a neutral impact on EBITDA. Can you just give us some color what’s going on there and some detail there?

Brad Helgeson

Yeah. The biggest driver there Flavio is the transfer stations that we acquired at the end of last year. (Indiscernible) this gets to part of the reason why we have presented the business with EfW versus non-EfW because it’s a great example where revenue came on associated with the transfer stations, the nature of those operations as you know is that the revenue essentially is offset by the cost. It isn’t a significant profit driver. So that’s what was impacting for the most part that call on this year.

Tony Orlando

I would add on to that that while as Brad said it’s not a big profit driver and the transfer station proved to be a very, very good acquisition in terms of this location. And we really got the benefit during the winter when waste deliveries were interrupted in a lot of locations to be able to feed into our facilities. So it was a great acquisition but it’s not one that’s going to drive in EBITDA pickup.

Flavio Campos - Credit Suisse

That’s very helpful. And on capital allocation, with the new dividend, does that indicate that are we done with the buybacks as a lever at least for the foreseeable future. I mean, you haven’t repurchased any shares for the past couple of quarters. How are you guys taking about buybacks in the future now?

Brad Helgeson

Yeah. Buybacks going forward, I’ll get back to 2014 in a second. Buybacks going forward will remain part of our calculus and our considerations for capital allocation. And I think as we -- I think we’ve been pretty consistent with the same. We’ve established our dividend that what we think is an appropriate and sustainable level and a level that we hope to grow over time to the extent that we can invest excess capital back into the business or externally to generate returns for shareholders in excess of our cost of capital. We’ll prioritize that to the extent those opportunities aren’t available. We’ll look at share buyback.

So they absolutely remain on the table. I had commented at the beginning of the year on the fourth quarter call that given what we have in front of us, I don't expect us to be buying back any stock this year that doesn’t mean it’s totally off the table but it’s our expectation and that remains the case.

Flavio Campos - Credit Suisse

Perfect. That’s great. And just the final question on the New York City contract. You guys mentioned that Q1 is starting to ramp up for the Queensbury transfer station. Any update on the timing for the Upper East Side one and how that is going?

Tony Orlando

Not any particular update. Still we have not received notice to proceed from the City on the East 91st Street transfer station. The city is progressing with construction and would expect -- it's our understanding they expect to complete that in 2016. And so we’re -- we're ready to go as soon as we get the green light from the City. That would be approximately $30 million incremental investment for the equipment on that. I was obviously not going to move forward with the investment on the equipment until we get notice received from the city. But -- so we’re looking forward to that and it looks like the current expectation might be some time in 2016.

Flavio Campos - Credit Suisse

Perfect. That’s great. I will give it back. Thank you for answering my question guys.

Brad Helgeson

Thank you.

Operator

Next question comes from Charles Redding of BB&T Capital Markets. Please go ahead.

Charles Redding - BB&T Capital Markets

Good morning gentlemen. Thanks for taking my call.

Brad Helgeson

Good morning.

Charles Redding - BB&T Capital Markets

I was wondering if you could just talk a little further about the capital expenditures for New York City. Have you encountered any delays with respect to procurement there and what portion of the project is really most involved from a permitting perspective?

Tony Orlando

I’ll take that one. This is Tony. The bulk of the investment there is for equipment, for containers, railcars, barges and what not. And that is all progressing very nicely. We also do have some work to do to optimize our efficiency at both the facility in Pennsylvania and Upstate New York that we’ll be taking the waste. There are some permits to work through on those but we have a number of options as to how to get the waste there and we’re really looking at maximizing efficiency by putting a rail yard up in our Niagara facility and making some other infrastructure investments at our facility in Pennsylvania.

Charles Redding - BB&T Capital Markets

Okay. And then on Indianapolis, I know this is 2015, 2016 event. In terms of the $45 million, in fact to resume the entirety of that would be included in 2015 growth CapEx and then I guess, would you expect to receive other operating revenue from the new construction on that?

Tony Orlando

So the step one there is, we do need to secure the final approval and decision by the city to move forward with the project and we hope that happens in the coming weeks. The next step would be to secure the permits. That shouldn’t take very long but that could be a few months for sure. So bulk of the investment is going to be 2015 and it’s an 18-month construction. So some of it probably runs in the 2016 as well. And then once as soon as the facility starts operating, yes, we’ll have incremental operating revenue from that facility. And we expect it to be a good solid investment.

Charles Redding - BB&T Capital Markets

Okay. Thanks. And really quickly on, do you guys expect to really receive any material benefit from cash taxes from any contention of bonus depreciation potentially at the end of the year?

Brad Helgeson

We don’t expect anything material to impact us from that potentially now.

Charles Redding - BB&T Capital Markets

Okay. It’s great guys. Thanks for your time.

Operator

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

Scott Levine - Imperial Capital

Hi. Good morning guys.

Tony Orlando

Good morning.

Brad Helgeson

Good morning.

Scott Levine - Imperial Capital

Obviously, a little bit more color on the maintenance side. Tony went into some detail with regard what your findings has been relative to your initial expectations. They are but maybe a little bit more color on how that is compared to expectations when you announced the preventative maintenance program last year and then with the 2Q coming in a bit late. Can you give us little bit more color in terms of the quantity of spend that would likely shift to the back half? And will that be more Q4 versus Q3, little bit more detail there would be helpful?

Tony Orlando

Okay. Sure. You’ve a lot in there but it’s an important topic. As I said earlier, what we, in particular, the proactive inspection that we’re doing on our turbines which is something that we really started this year where we’re doing a minor inspection to shut the machine down and get in and be able to look at it and assess what needs to be done at the next major outage as well as take care of any necessary repairs that we would find at this time.

Maybe way to help people understand this is kind of an analogy. It may not be a very good one but let me take a shot. You bring your car in for maintenance on the 50,000 mile schedule and the mechanic gets in and starts to look at the car and he says, your brake pads aren’t as worn down as we thought it would be.

We don’t need to replace them, good news. But we looked to some other part in the car and he says this part is more -- is not in great shape and we need to go ahead and replace it. It’s a same thing when we do all of our maintenance. We have a plan and we go in there and we have a lot of experience. So we have an expectation of exactly what we’re going to need to do, but until the machine is shutdown and our technicians and our workers get in to look at exactly what needs to be done, that’s when, when we make the final decision, based on the work that’s necessary to maintain that particular piece of equipment. We made some what we thought are reasonable assumptions on the turbine generators. So far, it’s been great news. We haven’t had to do as much work as we thought on those turbine generators.

So we’re only about two-thirds of the way through this year. And so we decided we weren’t going to change the full year outlook, but that’s a nature of maintaining complex facility like we have, and of course having a portfolio of 40-plus facilities. There’s a lot of ups and downs and it doesn’t change what the great story that we’ve got here in the first half of the year, doesn’t change our long-term outlook. We’ve told you what we think is a good reasonable run rate for the business. We continue to think that’s a good reasonable run rate long term. And some years, we’re going to be a little bit better than that run rate. And some years, it will be a little bit worse than that run rate, but it doesn’t change our outlook and the run rate.

Having said that, we’re very pleased with how things are going and we’re going to work to, number one, get all the work done that we need to, to ensure reliability of and high production for both ourselves and for our clients, but we will work to do that as efficiently as we possibly can.

Scott Levine - Imperial Capital

And so should we be favoring as well -- thank you for that, should we be favoring more Q4 or Q3 in terms of any shift from Q2?

Tony Orlando

One of the bigger outages that was shifted, I mentioned, up at our Niagara facility and that was shifted really actually a very short period of time from second quarter into third quarter. So, that was one of the bigger shifts. So I think you’re going to see some maybe a little bit higher than we would normally have in the third quarter.

Scott Levine - Imperial Capital

Got it. Thank you. And then maybe as well a little bit of color, it sounds like the metals program has kicked in to another year here in this quarter. A bit more color on how that’s tracking relative to the last couple of quarters and what drove the improvement there.

Tony Orlando

Well, I think as I mentioned last -- in the first quarter, there were couple of things. It was actually a little lower than we had hoped in the first quarter. And there were two reasons for that, one, was just the extremely cold weather made it a little bit challenging to optimize the recovery. But the other was that we had a couple of very large new systems that came online late in 2013. And as you can imagine when you bring a new system up, it takes a little time to kind of fine-tune and optimize it. And I think we’ve now gotten to the point where we’ve really got those new systems kind of humming and we’re probably at a pretty good run rate where we are in this quarter. We’ve got a little bit more to do on putting a few smaller new systems in, but we really feel good about how that investment is bearing fruit.

Scott Levine - Imperial Capital

Got it. Thank you.

Operator

(Operator Instructions) The next question comes from Michael Hoffman of Stifel. Please go ahead.

Michael Hoffman - Stifel

Hi, good morning. So figure out the right questions then. I guess I need a clarity -- the question on Dublin. You will build this. It’s just got to get through the rest of the process. It’s not though if, it’s just finishing the process.

Tony Orlando

Michael, until it’s done, it’s not done. That’s a nature of any complex construction project. We feel good, that’s why we’re engaged with our clients and we’re working hard to make that happen, but it’s not over -- you know it’s not over until it’s over. There are still things that have to get done.

Michael Hoffman - Stifel

Okay. And then part of that same question, when you do, do Dublin, this isn’t like Durham, York or Honolulu. There is not going to be construction revenues.

Tony Orlando

That’s correct. Unlike those two projects that are owned by our client and we’re generating revenue and expense to build the projects. In this case, we will own it. So there will be a capital investment in a growth CapEx and no revenue until we actually start the unit up and start to generate electricity and process waste.

Michael Hoffman - Stifel

Okay. And then under growth then, so the growth and maintenance issue if, how do we think about whatever our assumption is for our own modeling purposes within the guidance you’ve given on maintenance expense? How would you articulate or frame for us how we should think about how that maintenance number grows? Is that an inflation growth? Is that a little more inflation, little less inflation, how do you think about that?

Tony Orlando

I think inflation is a reasonable expectation. Again, we’ve kind of laid out what we think is a good run rate and what we’re constantly trying to do here is. We’ve got a plan that runs for quite a long time and looking at the major pieces of equipment that need to have attention and maintenance this year, last year, and to some extent next year turbines are the big focus, but we will be transitioning to cooling systems and rescue cranes.

So we kind of a plan of the things that we need to do out over the next five years. And our goal is to try to keep it at that run rate obviously to do better where we can. I think the one thing that we will hope to take that maybe down a little bit from inflation would be our cost savings initiatives right, a big part of the cost savings is with respect to how do we carry out our maintenance work more efficiently, and so to get the same amount of work done but to do it more efficiently. So if you take the run rate at an inflationary pace and then some of that will get offset with the cost savings initiatives.

Michael Hoffman - Stifel

Okay. And then on the growth side, how do we think about the payback period for Indianapolis, how would you frame that?

Tony Orlando

We think it’s going to be a good return. Clearly look this is a bit different. We think it’s a great opportunity to expand the scope of service to a client community, one where they have a relatively low recycling rate. And so it’s a good opportunity for us to do something that’s a bit different to help them achieve their sustainability goals. And we are doing it to service our clients, but we are also doing it to get what we believe is a good return on our investment.

Michael Hoffman - Stifel

Three years to pay back, three…

Tony Orlando

Yeah, we’re not going to get into the specific returns on the investment. And look clearly this one different than some of our others. It’s going to be subject to market price on the recyclable materials, but look we are looking at it long term and we think it’s a good strategic investment.

Michael Hoffman - Stifel

All right. And then one last if I may. The first tons coming out of New York City, are they going to one or the other, Pennsylvania, New York or can maybe split?

Tony Orlando

They can be split and we will make that final decision six months or so from now when we get there as to which one is best served or to go to both. Again, it’s a ramp up period. I think that’s probably the key. We probably will just go to one facility for a little while. This is kind of significant logistics effort and coordinating with all our various subcontractors as well as New York City. And so it will ramp up over a fairly long period of time actually to make sure everything goes smoothly for our customer.

Michael Hoffman - Stifel

Okay. Perfect. Thank you very much.

Operator

The next question comes from Gregg Orill of Barclays. Please go ahead.

Gregg Orill - Barclays

Congratulations on the quarter. Just on the specialty waste, I know you said it was meeting or beating your expectations just to -- I know it’s a smaller part of the business, but if there are any milestones there or what you’re looking for in the future?

Tony Orlando

We’ve been growing. Last year we are in the mid-teens growth rate. Our goal this year is to continue growing a plus 10% and we see a long runway to continue to grow that business at 10% plus. Team is doing a very good job. There is not anyone big huge contract there. It’s a lot of little small wins and a lot of really getting out there and selling what we have to offer to our customers, which is a combination of a sustainable solution and assured destruction and continuing to provide service that our customers want.

And I think we continue to mature and grow in that area in terms of really transitioning from where we’re five years ago where we’re very, very focused and still are on a very large municipal customers, but we’ve now created a whole separate organization that’s very focused on a number of -- a large number of customers that we can continue provide service for. So we feel good that we’re going to continue to grow with 10% plus.

Gregg Orill - Barclays

Thank you.

Operator

The next question comes from Al Kaschalk of Wedbush Securities. Please go ahead

Al Kaschalk - Wedbush Securities

Good morning, everybody. Just wanted to follow back up on the maintenance item and trying to put a spear in it or what, but I guess what we’re struggling with or trying to understand investors are. It sounds like you quantified the range on an annual spend on freight maintenance expense of that 250, 260. We are hearing you are doing better than that, but yet you left that range out there sort of an ongoing annual spend. So I guess it’s sort of two-part question, but one is appreciating why that shouldn’t grow with inflation. And then, two, why aren’t you going to have additional capital investments to extend the life of some of these plants given their age? And so how do we think about the dollar spend, whether it’s CapEx, that’s capitalized for the life of plant or higher annual maintenance expense?

Tony Orlando

Quite sure I follow your question, but let me take a shot. As you’re well aware, last year we laid out numbers that we felt both on the expense and capital side would be an appropriate run rate and they were higher than they had been historically. And that was to take care of the things that we need to do on both the expense and capital side to ensure that we run reliably with higher production at our facilities for many, many years to come.

So, we did -- you said, why shouldn’t we expect a higher CapEx and it is higher than it was a couple of years ago, but we’ve laid out a plan that that we believe this is a good number. And it is sure, we’ll fluctuate up and down year-to-year as because some of the projects are quite big, but we think that’s a good run rate to look at on a long-term basis.

Al Kaschalk - Wedbush Securities

And then so -- fair enough, but on the plant maintenance expense, I guess we should view this a little bit from a broader perspective. You put out an estimate with the nature of the expense, whether it’s turbines or cooling systems or refuse. You will have some variances during your operating assessment when you take it down. But at the current stage of the plants, the spend rate that you feel you’re comfortable with is 250 to 260.

Tony Orlando

Yeah, on the expense plus kind of that 100 little bit of -- over a $100 million on the capital.

Al Kaschalk - Wedbush Securities

The maintenance CapEx.

Tony Orlando

Yes.

Al Kaschalk - Wedbush Securities

Right. Okay. Thanks a lot.

Tony Orlando

Thanks.

Operator

The next question comes from Barbara Noverini of Morningstar. Please go ahead.

Barbara Noverini - Morningstar

Hi. Good morning, everybody.

Tony Orlando

Good morning, Barbara.

Barbara Noverini - Morningstar

Some of your peers in solid waste have back-paddled a bit from investing in recycling capacity due to the challenging economics of the recycling industry. What gives you confidence that offering recycling services such as this plant center in Indiana is a good long-term strategy for Covanta?

Tony Orlando

First off, I would say that we think recycling makes sense. It makes sense for our customers and there’s going to continue to be a push from our client communities to increase the recycling rate, that’s certainly something that we see. And then, what we’ll do is we’ll assess each particular situation as to how and where and if it makes sense for us to get involve.

So in the Northeast in the past, what we've done is we've bundled services to offer recycling to our clients and we've done that in a way with subcontractors that were not really taking market exposure on the recycle commodities. Here in the Indianapolis, the situation was different. The recycling rates are quite low in the city. And based on this new technology, we saw a good opportunity to invest, to provide that service to our customers and to extend our relationship with them for another 10 years.

So we see it as a very positive step for both us and for our clients in Indianapolis. And then, we’ll assess other situation based on the merits at those particular locations, so we’ll kind of take a step at a time.

Brad Helgeson

And Barbara, it’s Brad. I just want to -- one thing I’d to add, it’s important to highlight that this facility that we are hoping to build with the city of Indianapolis is not a typical MRF, this is a -- in the United States anyway a relatively new technology where the facility will receive waste just like the energy from waste facility would receive the waste. And it represents essentially front-end processing to remove recyclables from the waste stream prior to moving on to energy from waste. And of course, given that we’re paid at the front end when the waste comes in. So it’s all hard to kind of think about this as a direct comparison to a typical MRF where we recognize that the operators of those MRF often struggle with those operations depending on the commodity background.

Barbara Noverini - Morningstar

Got you. And that’s a helpful distinction. So based on all of that, would you see it’s fair to say that that recycling has become a more meaningful factor in contract renewals as they come up for discussion?

Tony Orlando

I would say each community has their own desires and plans. I think many of our communities manage their own recycling systems. And so a lot of them are very aggressive in their approach to sustainable solutions in recycling and managing themselves. Others would rather have a commercial customers do it. So, I don't think this is necessarily a trend that we’re going to see. But it was something that certainly made sense for us at this facility and perhaps will at other facilities, we just have to see how that plays out.

Barbara Noverini - Morningstar

Okay. Thank you very much.

Tony Orlando

Thank you.

Operator

The next question comes from JinMing Liu of Ardour Capital. Please go ahead.

JinMing Liu - Ardour Capital

Good morning. Thanks for taking my question.

Brad Helgeson

Good morning.

Tony Orlando

Good morning.

JinMing Liu - Ardour Capital

Tony, I have a question for you. Can you comment on the competition environment of waste energy industry in general? You renewed your personal contract with lower point and lost your Hudson Valley contract to a major competitor. So can you give us more color on that?

Tony Orlando

Yeah. Well, I’d say that there is really two separate and distinct questions here because one is what’s the competition in the waste market, which is the case for Boston, so that was a bit disposable waste at any particular location. And each market is regional, I would say overall there is a pretty good stability in the waste market.

Not a big change in kind of the overall dynamics in the amount of waste generation. Boston and the Massachusetts area in particular I think, is probably going to see more change than we have seen in other markets as waste generation rates have come down a bit there. But we're also as you look out over the relatively short period of time, there’s going to be a number of landholder closing in the area.

So we think that while there’s been some downward pressure in that market for the last several years. As we look out a few years, we think maybe that’s going to turn around with some upward pressure. So that’s kind of the waste market and is very regional and unbalance, it’s pretty unstable. The waste to energy competition is kind of a different story.

Essentially, in terms of new projects, we don't see a lot of new project in the U.S. given the relatively low energy prices and lack of regulatory support. And in terms of competition to operate existing facilities, certainly our track record in that regard is very, very good. We’ve renewed virtually all of our operating contracts. The particular one in Hudson Valley, given the technology and the terms, we decided not to offer a responsive bid there and one of our competitors did so they’re now operating that facility.

It’s basically, as you’ve got really two primary competitor, but there are number of others. There is company that’s building a new facility down in Florida, but we don't really expect to see a lot of new facilities in the U.S. So I’m not sure how relevant that is.

JinMing Liu - Ardour Capital

Okay.

Tony Orlando

Hopefully that’s helpful.

JinMing Liu - Ardour Capital

Yes. That’s very helpful. And my last question. I’m looking at your cash position and historically you had a big chunk of the cash oversea. This looks like you repatriate some of those cash back to the space. Are you’re going to continue to do that or keep your cash offshore just for like you support the Dublin project.

Brad Helgeson

Yeah. JinMing, its Brad. So we have cash into different places offshore, some of which can come back, come of which cannot. I think the biggest piece of that cash, a little over $100 million, which has been the focus of much of the discussion and questions we get around our ability to repatriate. The little over $100 million, which we currently have in Europe, would not be able to be repatriated without tax consequence and the Dublin project is a very logical investment opportunity for that cash to the extent that it moves forward.

JinMing Liu - Ardour Capital

Okay. Thanks a lot.

Brad Helgeson

Thank you.

Tony Orlando

Any further questions?

Operator

Actually, we have a follow-up from Gregg Orill of Barclays. Please go ahead.

Gregg Orill - Barclays

Thanks. Just Tony made a comment about facility being built in Florida. Is that something you’re competing on or …

Tony Orlando

No. Facility was built actually a couple of two, three years ago. It’s in West Palm Beach. And we did bid but not successfully and that project is now under construction.

Gregg Orill - Barclays

Okay. Thanks.

Tony Orlando

Okay. Great.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Orlando for any closing remarks.

Tony Orlando

Thanks everybody. Hopefully you’re enjoying the summer. It’s hard to believe we’re halfway through the year already but we’re looking forward to our next discussion and finishing the year strong. Take care.

Operator

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

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