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Executives

Anthony Orlando - President and CEO

Sanjiv Khattri - CFO

Tom Bucks - CAO

Brad Helgelson - Treasurer

Alan Katz - VP of IR

Analysts

Carter Shoop - KeyBanc Capital Markets Inc

Gregg Orrill - Barclays Capital Increase

Al Kaschalk - Wedbush Securities

Benjamin Kallo - Robert W. Baird & Co

Daniel Mannes - Avondale Partners, LLC

Scott Levine - JPMorgan Chase & Co

Michael Hoffman - Wunderlich Securities, Inc

JinMing Liu - Ardour Capital Investments, LLC

Covanta Holding Corporation (CVA) Q1 2012 Earnings Conference Call April 19, 2012 8:30 AM ET

Operator

Good morning, everyone, and welcome to the Covanta Holding Corporation’s First Quarter 2012 Financial Results Conference Call and Webcast. This call is being taped and a replay will be available to listen to later this morning. The playback number is 855-859-2056 or 800-585-8367 for callers in the U.S. and 404-537-3406 for those of you calling from outside of the country. The replay pass code is 68607350. The webcast will be archived on www.covantaenergy.com. And can be replayed or downloaded as an MP3 file.

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

Alan Katz

Thank you, Therese, and good morning. Welcome to Covanta’s first quarter 2012 conference call. It’s great to speak with all of you again. IR has had a busy quarter. In addition to our normal activities here in the U.S., we did a lengthy trip to Europe this past quarter. The feedback on the Covanta story and Management’s focus on shareholder friendly actions was very well received on both sides of the pond.

Joining me today on the call will be Tony Orlando, our President and CEO, Sanjiv Khattri, our CFO, Tom Bucks, our Chief Accounting Officer, and Brad Helgelson, our Treasurer.

We will provide an operational and business update, review our financial results and then take your questions. During their prepared remarks, Tony and Sanjiv will be referencing certain slides that we prepared to supplement the audio portion of this call. These slides can be accessed now or after the call in the Investor Relations section of covantaenergy.com. These prepared remarks should be listened to in conjunction with those slides.

Now on to the Safe Harbor. The following discussion may contain forward-looking statements and our actual results may differ materially from those expectations. Information regarding factors that could cause 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, April 19, 2012. We do not assume any obligation to update our forward-looking information unless required by law.

Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Covanta is prohibited. The information presented includes non-GAAP financial measures. Reconciliation to the most directly comparable GAAP measures and management’s reasons for presenting such information is set forth in the press release that was issued last night as well as in the slides posted on our website. Because these measures are not calculated in accordance with U.S. GAAP, they should not be considered in isolation from our financial statements, which are 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’ll turn the call over to our President and CEO, Tony Orlando. Tony?

Anthony Orlando

Thanks, Alan, and good morning, everyone. Let’s begin with a quick summary of the quarter.

For those of you using the web deck, please turn to slide 3. Our first quarter results were right in line with expectations and we’re making solid progress on our full-year plan. Compared to the first quarter of 2011, revenue was up 4%, adjusted EBITDA was up 3%, free cash flow was up 15% and adjusted EPS improved $0.01.

In addition, in the phase of challenging energy markets, we reaffirmed our full-year guidance. We’re also making steady progress on objectives that will drive long-term results. This includes extended contracts, and executing on our organic growth initiatives. In addition, we took advantage of the market conditions to refinance our corporate debt.

Sanjiv will describe this in detail. So, I will just say, our team did a great job. We extended our maturities on favorable terms and we added a great deal of flexibility to our balance sheet. Furthermore, we continue to deliver on our commitment to return excess capital to shareholders.

In March, we doubled our regular quarterly dividend and we continue to actively repurchase stock this quarter. We’ve now repurchased over 15% of our shares outstanding since the start of the program.

Let me now turn to the business outlook. We will start with waste on slide 4. As we’ve said many times, about 75% of our waste revenue is under long-term contract. And we’re pleased our clients continue to recognize the beneficial service we provide by extending these contracts.

Last quarter I highlighted our Union and Alexandria contract extensions. We had another successful quarter with two more waste contract extensions. First, we signed a five-year contract extension to operate in the Montgomery County, Maryland facility. This contract now runs through 2021.

We’re installing one of our new technologies to reduce our clients cost and there are few other changes, but for the most part the terms are similar to the existing contract. The second extension is at our Tip Fee facility, in Springfield, Massachusetts. Here we extended the contract with our anchor tenant and host community with a 10-year extension that runs to 2024. This contract represents about 1/3 of the capacity of our Springfield facility. The agreement also includes an amendment to our contract relating to the ash monofill that is directly adjacent to the facility. This will support our plan to build and operate a new metal recovery and recycling facility at the monofill, allowing us to grow our metals business.

The Montgomery and Springfield extensions are both win-win solutions. Good for the environment, good for our clients and good for Covanta. We’ve updated the chart on slide 20 in the appendix, which shows just how successful we’ve been renewing our major waste contracts over the past few years. Apparently this chart isn’t quite helpful, so we will continue to update it.

With respect to the general waste market, we continue to see some pricing pressure in the Northeast. However, with so much waste under contract, we have very stable revenue. In fact, our average Tip fee pricing was up slightly, a little bit less than half a percent in the quarter. Our service fee pricing was also up as a result of contract escalators. Volumes were generally flat for the quarter and our plants continue to run at full capacity.

Looking ahead to the reminder of the year, we will continue to see inflationary level price increases for our contracted waste agreements. With respect to spot waste pricing and contract renewals, we’re likely to see some pressure from landfills. We aim to mitigate this with our organic growth initiatives focused on securing higher price waste.

Moving on to the energy portfolio, please turn to slide 5. In terms of the current trends, the natural gas and electricity markets remained depressed. In fact, as most of you probably know prices have dropped further since our last earnings call. Full-year natural gas prices are now forecast to be about $2.50 versus the $3 price that we’ve discussed when we initially issued guidance.

If you recall, we’ve 75% of our anticipated 2012 revenue under contract with fixed price contracts and we also gave you a rule of thumb at the time that for every $1 move in natural gas prices, we would see a $10 million to $15 million annualized impact to our 2012 adjusted EBITDA. Using this rule of thumb, the $0.50 move that we’ve seen in natural gas prices causes a $5 million to $7.5 million decline in our adjusted EBITDA.

We see this as manageable and we’re working on many fronts to offset this decline. With respect to energy revenue, for example, we’ve recently hedged additional output for the upcoming fall shoulder months. Furthermore, we’re also managing the longer term energy outlook by seeking to enter additional contracts with floor and ceiling prices.

Along those lines, I’m pleased to report that we recently signed several steam sale contracts related to our Niagara, New York facility. These are 10-year contracts, which will take effect next year. In this current low natural gas price environment the floor price is valuable to Covanta. Over the long run, I’d expect the ceiling to be beneficial to our customers.

We’re also pleased to be increasing our total steam sales. Historically, we’ve been selling the equivalent of about 250,000 megawatt hours of steam at our Niagara plant. And by 2014 we expect that to increase to about 400,000 megawatt hours, with the new demand starting to ramp up in the middle of next year. To meet this increased steam demand, we’re going to install a new natural gas package boiler and build a steam line to connect to our new customer. This was already included in the growth CapEx estimate that we gave you at the beginning of the year.

Let’s move on to metals on slide 6. We’re making very good progress, recovering more metal from the waste. This quarter we increased ferrous recovery by 9%. We’ve also improved metal quality and pricing. Year-over-year HMS #1 Index was slightly down, but our average ferrous price was up 9%, due to the improved quality of our metal.

Non-ferrous market pricing was also slightly down. However, our non-ferrous volume was up, which more than offset this. In fact, we increased about 15% on the volume for non-ferrous that we recovered. As a result of this good work, our first quarter metal revenue increased by nearly $3 million even though metal markets were slightly down. This is just early evidence of our organic growth initiatives kicking in.

Pricing and demand for ferrous and non-ferrous metal remained strong, and continues to be in line with our expectations when we first issued guidance. As a reminder, the rule of thumb that we gave you on our last earnings call was that, for every $50 movement in the full-year HMS #1 Index, we would see approximately a $10 million annualized impact to our adjusted EBITDA.

Moving on to slide 7, I want to spend a few minutes summarizing our organic growth progress. As I just mentioned, we’ve already made some great headway in improving metal recovery rate. And that’s largely related to modifying and more aggressively managing existing systems as well as the installation of our new ash conditioning technology.

I’m very pleased with that. But an even bigger part of the organic growth program relates to the capital investments focused on recovering more metal. To facilitate these investments we entered into a strategic alliance with Steinert, a leading provider of non-ferrous metal recovery equipment. This agreement to purchase equipment will help us move quickly to install additional non-ferrous systems. In addition, they will help us achieve greater efficiencies with our current system.

We are also planning to invest in a couple of ferrous recovery upgrades and one-third shredder. In total we’ve got about 10 projects in various stages of implementation. We’re holding the aggressive plan we set for ourselves with most of these projects scheduled to come online near the end of the year, so we’ll see some benefit later this year with a much bigger benefit in 2013.

Moving to special waste; we continue to grow our sales force this quarter to expand our geographic reach and we are actively marketing zero landfill disposal option as well as our specialty service. As I discussed in the last call, our special waste initiative would give us modest improvement for 2012 and we did in fact improve special waste revenue during the first quarter. We expect to see the full benefit in 2013 and beyond.

We've also made good progress utilizing technology and process improvements to generate cost savings throughout the value chain. We've installed new ash conditioning systems at some facilities to save on ash transportation and disposal cost. We're implementing new systems to enhance efficiency of maintenance expenses and we’re improving our procurement process all of which will lead to cost savings.

The final leg of our organic growth relates to new units coming online. Last year we completed construction and began two additional facilities in China, Taixing and Chengdu. These facilities are running well and as planned. They are contributing to improve year-over-year results.

Construction of our Honolulu expansion remains on track for first refuse fire during the second quarter. The project is 88% complete and we expect to go into commercial operation during the third quarter. And finally Durham-York project is also on schedule. Design and procurement is well advanced and we're now in the early stages of construction. We're approximately 10% complete at the end of this past quarter.

Turning to slide 8, I would like to offer a quick summary before passing the call to Sanjiv. Again we're executing well from both a financial and operational perspective. The refinancing gives us additional flexibility and we remain focused on shareholder returns as we've demonstrated once again in this quarter.

In addition our organic growth initiatives are really gaining traction, all of which keeps us on track to meet this years financial guidance. It also boards well for the long-term, so too does our client satisfaction. Nothing reinforces our success in this regard more than client renewals. Our success extending contract is a real testimony to the great job that our team does day in and day out.

With respect to our new business development, there hasn’t been much tangible progress to report this quarter, but we continue to actively pursue a number of opportunities with a disciplined and targeted approach. We expect to gain clarity on several prospects later this year. Overall, I am quite pleased with how we’re managing the business during this difficult energy environment. I am confident in our team’s ability to create shareholder value by servicing our clients with innovative world-class operations by smartly managing our assets, risks and capital allocation and by aggressively executing on our organic growth initiatives.

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

Sanjiv Khattri

Thanks, Tony. Good morning everybody and good afternoon to those of you calling in from Europe. As Alan mentioned we did a world-wide trip overseas this past quarter, five cities in four days. It was great to meet some new potential investors and we’re looking forward to expanding to -- continuing to expand our investor base both here and abroad.

We have a very compelling investment thesis, so we appreciate the expanded investor interest, rock solid operations, stable revenue with both organic growth and Greenfield growth opportunities, lots of free cash flow, high dividend and, and, and...

Coming back to the quarter, as Tony said we had a great start to the year and are making solid headway versus the plan that we laid out earlier in the year. It’s also exciting to see the progress that we’re making on our organic growth initiatives which Tony just went through. These are important steps in our year-over-year growth plan, so net-net a good solid quarter.

I’ll start with a quick overview of how we performed during the quarter. I am on slide 10 which lays out our Q1 financial highlights. Our quarterly numbers came in strong with year-over-year growth on all our key metrics. As usual I'll walk through the financial various waterfalls over the next few slides. Before we get into the numbers, I want to flag chart 21 in the appendix which we have always included, it is a more detailed summary of the P&L.

Starting with revenues waterfall on slide 11; our total revenues in the first quarter is up by about $15 million year-over-year to $392 million. The most significant driver was higher construction revenue of $12 million in the quarter driven primarily from the impact of Durham-York which is ramping up nicely. There was also $5 million of organic growth initiatives. We also had other operational improvements of about $3 million this quarter. There were some offsets from the weaker energy; that are energy from waste facilities and a reduction in debt service revenues. You heard the details on energy revenues from Tony earlier in this call.

Moving on to slide 12 for adjusted EBITDA. Adjusted EBITDA was up $2 million year-over-year to $73 million. Organic growth initiatives including higher metal revenues from improving both the quality and quantity of metals, increase special waste, cost savings from process improvements and our China units come online were all positive drivers for adjusted EBITDA to the tune of about $7 million.

We also had an $8 million benefit due to operational improvements, including contract escalations and extensions, increased energy volumes and the timing of maintenance expense this quarter that we plan to incur in later quarters of this year. Please keep in mind that the overall picture for maintenance activity and expense is unchanged for the full-year and it’s consistent with what we covered when we rolled out our 2012 outlook.

We had a few negatives offsetting all of this pickup. All of these items were anticipated at the beginning of the year with the $7 million impact from lower debt service passed through billings and the reduction in alternative fuel tax credits right inline with expectations. As described by Tony earlier, the lower energy price is down more than we had originally anticipated and we are working to successfully mitigate that.

Turning to slide 13, let’s briefly discuss Q1 free cash flow, which was $76 million up $10 million from the first quarter of last year. We had the $2 million of adjusted EBITDA benefit this quarter that I covered just now. However the bigger driver for free cash flow increase this quarter was working capital.

In looking at working capital there are two components. The first is related to construction activities, while the second is related to our current plant operations. The construction component is very lumpy. There is a frequent mismatch of quarterly inflows and outflows with large increases or decreases to free cash flow as a result. If you recall, so in assessing working capital you have to first assess the impact of the construction related working capital. If you recall in 2010, we had a pickup due to construction which flowed out in 2011 and will continue into at least 2012.

The second component relates to the normal ups and downs of operating plants. These are much more stable and the variance is related to typical inventory, accounts receivable and accounts payable flows. The net impact of all this in Q1 was about an $8 million year-over-year pick up in free cash flow.

However as I'll discuss later when we talk about Q2 outlook, the free cash flow will again be very lumpy on a quarterly basis due to the way construction working capital is playing out. The important point to be noted is that we are very confident that we will hit our full-year free cash flow guidance of $250 million to $280 million.

Now turning to slide 14, our adjusted EPS is up compared with last year. We had the benefit of higher operating income this quarter. Since we have a lower share count year-over-year as a result of our buyback program and due to a net loss for the quarter, our adjusted EPS loss actually worsened. This is of course counterintuitive, but we will of course realize the benefit of the lower share count in space when we have positive net income in the remaining 2012 quarters and for the full-year.

Let’s turn to slide 15 for an update on our capital structure. As Tony mentioned earlier in the call, we completed $1.6 billion in debt transactions in March. This was a huge success on part on our team; we dramatically increased our liquidity by over $300 million and now have more than $600 million of dry powder available to us under the revolver. I am very pleased with the end result of this transaction. Our $400 million of 10 year senior notes priced at 6.38% and our term loan is also very attractive. We saw no substantial changes in our covenants and we moved some of our leverage to the whole core level, freeing up capacity at the operating company. Finally we have increased our revolver from $300 million to $900 million at very attractive terms.

In looking at the debt balances at the corporate whole core level, the next piece of debt coming due is the convertible notes due in 2014. This is at 3.25% annual rate and after factoring in our calls per hedge we have an effective convergent price of around $23 per share. So even with today’s attractive debt markets we don’t currently plan to refinance this early as it represents very low cost debt.

One quick comment on interest expenses; going forward excluding non-cash interest we expect near term book interest expense in the $25 million our quarter zip code. The actual expense will be impacted by the floating portion of our debt and the drawdown balance on the revolver. The cash impact is a bit lumpier with both the high will tranches paying out interest by annually in the second and fourth quarter respectively.

In summary as we discussed at the time of issuing the debt. This financing gives us a lot of long term financial flexibility as we consider both growth and shareholder return activities. As you can see in chart 22 in the appendix which lays out the balance in the format you’ve been used to, we continue to maintain a healthy balance sheet, low levered rations and as a result have lots of dry powder.

Before we move on, I’d like to flag the last bullet on the capital structure slide. Just a few days ago we closed on our financial asset sale of our Asia IPP Assets, the Haripur plant in Bangladesh. The total gross proceeds from all four asset sales was $281 million right in line in the range of the $270 million to $290 million that we told investors when we -- that is what we anticipated at the onset.

Last year we tax efficiently repatriated $137 million to the U.S. These funds were part of the pool that was used to repurchase over $230 million of stock, the remaining proceeds have been held overseas for potential international growth investment. The team did a great job over the past year in selling these assets and now we can become even more focused on our core business of energy-from-waste.

Let’s move on to slide 16 to go through our capital and return activities for this quarter. Over the past two years, we’ve said that we’re committed to returning capital to shareholders. We generate a lot of free cash flow. We invested in high-return growth project and whatever is left goes back to the shareholders as dividends or share repurchases. Hopefully, our continued actions in this regard clearly demonstrate that we’ll put our money where our mouth is.

Last month, we doubled our quarterly cash dividend to $0.15 per share or $0.60 per share on an annualized basis. At today’s stock price, that’s close to 4% dividend yield. During the first quarter, we also repurchased 1.8 million shares of stock for $30 million. This reduced our weighted average account to $134 million at quarter-end.

Since we started our buyback program, we bought back over 15% of the company. We still have $145 million remaining on authorization and we plan on continuing to buyback stock until we tell you otherwise. As long as our free cash flow yield remains high and we’re not compromising our high-value growth activity, this remains a great use of our free cash flow.

Several quarters ago I walked you through the table on slide 24 in the appendix, which highlights how we get on a sustainable basis from our lower net income to our higher adjusted EBITDA and free cash flow. Since then, we update this chart every quarter and included in the appendix as we’ve done this quarter too.

However, as we meet more and more new investors we get asked so often, why is your free cash flow so much higher than net income? Is it sustainable? So, we thought we would include in the appendix a quick refresher on why Covanta on a sustainable basis generates levels of cash flow from fairly modest levels of net income.

This commentary is on slide 23, and it sinks with the numbers on slide 24. I’d encourage you to go through this. We’re happy to take questions on this very important investment strength of our business.

Slide 17 summarizes our 2012 guidance, which we’ve reaffirmed as part of our Q1 update. As Tony mentioned, we’re executing on plan and on track to grow our adjusted EBITDA and adjusted EPS this year. Free cash flow would be impacted by working capital, primarily from construction activities, but underlying cash flow is doing very well.

I conclude with a quick summary for the outlook for the second quarter on slide 18. First, I’ll remind everyone again that we’re on track for our full-year guidance, but that there will be some impact from both the typical seasonality and the construction working capital timing. These impacted the first quarter by increasing our free cash flow and will continue to impact the second quarter to the negative as I’ll explain. Regardless, you should see a meaningful pickup year-over-year in all of our key financial metrics in the back half of the year.

In reviewing the Q2 outlook as usual, I’m referring to year-over-year variances. Adjusted EBITDA will be relatively flat in Q2. We’re executing on our growth initiatives, but our results will be impacted from lower debt service pass through billings. Remember that this no impact on our unencumbered cash.

With respect to free cash flow, Q2 has historically been our [seasonally low] quarter as we pay bills for our scheduled maintenance activity, including maintenance CapEx and we’ve a high yield interest payment. This year will be no different. In addition, we had positive construction working capital in the first quarter, which will reverse significantly in the second quarter.

As we’ve said before, quarterly swings in our free cash flow is not what is important. We focus on our full-year performance. In prior-years, we’ve typically seen a big pickup in total free cash flow in the back-half of the year, and this year will be no different. In fact if I recall right, last year about 2/3rds of our free cash flow came in the back-half of the year. The important thing to note is that our full-year free cash flow guidance remains strong at $250 million to $280 million.

In terms of adjusted EPS, the higher debt expense from our refinancing will offset our core business growth and the benefit of our share repurchases. Like adjusted EBITDA and free cash flow, adjusted EPS will also be stronger in the second half.

So, in summary, Q1 actual and the Q2 outlook is paying out as we anticipated and is consistent with our full-year guidance. It feels great to report to you that we’re executing on our near-term operating and financial objectives and are laying the foundation for both short-term and long-term growth.

Now, let’s move on to some Q&A. Therese, if we could please open up the phone lines for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Carter Shoop with KeyBanc.

Carter Shoop - KeyBanc Capital Markets Inc

Great. Good morning, guys.

Anthony Orlando

Good morning.

Sanjiv Khattri

Good morning, Carter.

Carter Shoop - KeyBanc Capital Markets Inc

First question is can you provide us an update on your development projects in Europe. I’d be curious to hear how confident you’re about getting financing lined up for Dublin, should investors be thinking about this as more of a long shot opportunity or more a 50/50? And then also, are you still feeling pretty, feeling like the Ince Park project the 50/50 chance? And then lastly, any update with Midpoint, Green Hills or Rookery South?

Anthony Orlando

Well, let me take Dublin first. This is Tony. I think as we said a couple of times in the past, though we’re working closely with our clients at Dublin City Council, we both believe the project makes sense and supports the Irish policy initiative to reduce dependants on land filling. We both like to restart construction. And as we said before, we view it as a very attractive project, but we don’t want to move forward absent some third-party financing.

We’ve initiated a process, and we plan to be in a position late this summer to make a decision based on the outcome of that process with respect to the financing and a decision to move forward. So, I think we’ll get some clarity on that by the end of the summer on Dublin.

I think we’re also going to get clarity on our Ince Park project this summer as well. We’re -- its one of two bidders remaining. We’re obviously putting our best foot forward, and I believe we’re putting forth a very attractive bid for the Merseyside clients. It’s a competitive process, and they’ll be selecting the preferred bidder this summer. So, we remain optimistic on that process as well.

And then, there are a number of other projects that are in the pipeline, but really the focus – those are the two near-term opportunities in Europe.

Sanjiv Khattri

Carter, I just first of all want to welcome you to the Covanta team. We’re thrilled that you’re now covering us. And I don’t have much to add, I mean, the financing markets are difficult. I think it would be premature to handicap anything. We’re going to give it a good shot and see how it works. I think the discipline is there though. Dublin is an exciting project, but we’ll not move forward absent financing. So that’s clear and obviously the situation in U.K. is a lot more constructive.

Carter Shoop - KeyBanc Capital Markets Inc

That’s helpful. As a follow-up question, can you quantify the impact of some of your recent organic growth initiatives in metals, how should we think about the impact from the 10 new projects in 2013 and also in special waste, it sounds like you’re investing in that now. How should we think about that impact in ‘13?

Anthony Orlando

Well, we – obviously we did layout at the beginning of the year what we expect from all the organic growth initiatives in terms of the EBITDA impact for 2012. We haven’t yet laid out what our expectations are for 2013 and it would be premature to do so at this point, but what we said is that it’s our objective and focus to continue growing the business.

We do have obviously some headwinds right now with energy and some other headwinds. But it’s our goal too – and we’re really excited about the things we got going on in the organic growth side. Metals is kind of come out of the box real strong, we’ve got some great process improvements going on to drive down our cost. And we feel good that we’re going to gain a lot of traction. We’ve got I think a terrific asset base, it’s really unique in the business with the ability to offer the zero landfill disposable option with a large network. And we’re excited about where that’s going to take us, but it’s still early in the process.

Sanjiv Khattri

Yeah. Carter, you’re not on CVA then, we give guidance that organic growth was – could be as much as $20 million to $30 million year-over-year to our EBITDA and I think the early signs are good, very good.

Carter Shoop - KeyBanc Capital Markets Inc

And just to clarify, that’s for 2012? Thank you.

Sanjiv Khattri

This is full-year versus 2011.

Carter Shoop - KeyBanc Capital Markets Inc

Yeah.

Operator

Thank you. Your next question comes from Gregg Orrill with Barclays.

Gregg Orrill - Barclays Capital Inc

Thanks. Good morning.

Anthony Orlando

Good morning.

Sanjiv Khattri

Good morning, Gregg.

Gregg Orrill - Barclays Capital Inc

I was wondering maybe I can take another shot at the metals upsides for the organic growth initiatives, maybe in terms of how much of the waste steam are you recovering now in terms of metals on a percentage basis? And then, what’s a reasonable level that you think you can get to? I see on a trailing 12 basis recycled gross tons recovered is about 439,000. Do you’ve a sense for maybe what the goal could be?

Anthony Orlando

All right. We haven’t set out specific goals. Let me give you maybe some color around this and we did increase just this quarter about 15% on the non-ferrous and I think it was 8% or 9% on the ferrous recovery and we’re now providing a split between the ferrous and non-ferrous in the historical number, so that you can really better appreciate because there is a very big difference in price between ferrous and non-ferrous.

We’ve also kind of started the layout for you the key market metrics for both the ferrous and non-ferrous price and to give to a sense of that. And so then the question, the market, everybody can kind of put their own take on where the market is going, and the key question is your VAT is – kind of what volumes do you expect? I’d tell you that the big increase that we’re focused on is non-ferrous recovery with the agreement that we signed with Steinert.

We really think there is an opportunity there. Very low, when you look at the total number of tons that we recovered, it’s a very small number of tons. So, in terms of percentage of waste stream or what not, it’s a small number, but it can be very impactful because of the price for the non-ferrous. 15% increase this quarter really with tightening up systems; much of the capital that we’re investing now over the course of the rest of this year is going to be targeted at recovering more non-ferrous recovery.

Most of those projects don’t come on-line until late this year. We do have one project that’s going to come on-line in the second quarter. We’ll see where it’s going, but I think that’s going to be the key drivers to increase non-ferrous recovery.

Gregg Orrill - Barclays Capital Inc

Okay. And then back on slide 12, the organic growth initiative was $7 million in year-over-year EBITDA. How much of that was from the new units coming online?

Sanjiv Khattri

We don’t like to break that up Gregg. But the new units was quite modest for the first quarter, but over the year it should become a meaningful number. It was a very small part of the number.

Gregg Orrill - Barclays Capital

Okay, great. Thanks very much.

Anthony Orlando

Okay.

Operator

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

Al Kaschalk - Wedbush Securities

Good morning, guys.

Sanjiv Khattri

Good morning, Al. How are you? A very early morning for you.

Al Kaschalk - Wedbush Securities

Yes, very good. No problem though. Tony, I wanted to focus on two parts. One on the waste and service revenue line and the organic growth opportunity in the metals, which you just talked about. You made a comment about pricing remaining very competitive, so the question is; within that line could you shed a little color on the price and volume results relative to your expectations, because on the dollar value it was a little bit lower than what we had thought based on a fairly visible volume stream.

Anthony Orlando

The prices were in line with our expectation. Again, most of our waste revenue is under contract and tied to inflation indices like CPI and whatnot. So that’s pretty predictable, the escalations that we saw there were consistent with our expectations, the volumes were consistent and the pricing was from the spot perspective was pretty consistent as well. I mean maybe it was a little bit more challenging, but nothing really meaningful. I think when we – and when we came out with our guidance at the beginning of the year, I think we said that we are expecting 1% to flat for the full-year and we came in just a little bit less than a 0.5% for the first quarter.

Al Kaschalk - Wedbush Securities

Okay. And then switching gears, obviously you spent a lot of time on financing and getting the balance sheet positioned. But if I think about this a little bit more in a higher level, in essence what you’ve done is pushed a lot of financing flexibility to the parent company and you left the operating company or Energy Corp on a pretty low leverage ratio. First, is that the intent going forward due to, is there a reason the key Energy Corp at the low multiple level from a debt perspective, and then secondly what are you trying to signal to us about potential opportunities for the company given what is still a fairly underleveraged parent company?

Sanjiv Khattri

So Al why don’t I take that, as my Treasurer Brad always coaches me, you should always get your toughest capital in the best markets and at the energy level the capital is easier to get, it’s secured. The assets are in the same subsidiary in terms of cash flows, holdco is – on the margin can be really – slightly tougher, so in the best market you go for what you quote unquote. Now having said, that all the capital we accessed actually went very well.

You are very insightful in making the observation that at the energy level we have even more dry powder and at the holdco level even with 3.7% net debt leverage we are still pretty good. And this is all about financial flexibility, we wanted to create a foundation where our Board and our CEO would have the opportunities and financing was not a bottleneck.

So, taking the scenario where we are widely successful in our growth and as you know I always talk about growth with the big G, and growth with the small g, we're widely successful in all of that. We now clearly have the comfortable financial flexibility of being able to fund that using our own balance sheet in terms of the equity investment.

Separately if some of those things don’t play out and we want to lever up the business a bit more to be more proactive on shareholder actions, we have that flexibility too. So, it’s all about flexibility and the biggest sort of thing that we are the most pleased about is the $900 million revolver, we have $600 million of unused capacity there and that gives Tony and the team a lot of flexibility, and we wanted to take advantage of a good situation.

So there’s no explicit strategy that we want to keep leverage down at energy and high at holdco. It’s just the subordinated capital you want to get when the market is really good, that’s what my Treasurer has taught us and that’s what we did.

Al Kaschalk - Wedbush Securities

Okay. Thank you.

Sanjiv Khattri

Welcome.

Operator

Thank you. Your next question comes from Ben Kallo with Robert W. Baird.

Benjamin Kallo - Robert W. Baird & Co

Hey, thanks Tony. Thanks, Sanjiv.

Sanjiv Khattri

Hi Ben.

Benjamin Kallo - Robert W. Baird & Co

My question relates to the two projects that you guys noted as the most near-term. If we get a goose egg on that projects, they don’t go forward worst case scenario, then how are you going to approach further development and then – or is it back to the drawing board as far as what Covanta is, is it – are we going to start redistributing more cash through either dividend or stock repurchase, how do you look at that on the success or non-success of those two project? Thanks.

Anthony Orlando

Well, we’re focused on being successful there. That’s our objective and we feel like we are in a good position and we will cross the bridge later if it doesn’t pan out the way we would like it to, but right now we’re focused on being successful there.

Operator

Thank you. Your next question comes from Dan Mannes with Avondale.

Daniel Mannes - Avondale Partners, LLC

Hi. Good morning, everyone.

Sanjiv Khattri

Good morning, Dan. How are you?

Daniel Mannes - Avondale Partners, LLC

Good. First question, Essex County we’ve seen some – we saw a pretty big report out of Governor Christie that there’s a potential settlement there that would require some CapEx, but maybe some operational changes as well. Can you talk maybe a little bit about what's going on there and anything we might see?

Anthony Orlando

Yeah sure. Normally we like to describe deals when they are fully consummated, but as you said this was reported in the press a few weeks ago. So let me maybe put some color on it. We have a tentative agreement to restructure the Essex contract working with the port authority which is our client as well as all the other stakeholders. So we’re – we’re now trying to take that framework for an agreement and turn it into a final agreement.

As currently contemplated there are two main components to the transaction. The first would be a capital investment over the next several years like Covanta. The investment is largely related to installing new emission controls know as the Baghouse. That is something that we’ve actually wanted to do since we acquired the facility in 2005. Even though we’ve consistently operated the plant within our permit limits and we’ve already made significant improvements. We knew we could do even better with more modern equipment, so we’re pleased as far as this agreement we will be able to move forward with that. It would be slated to begin construction in 2014, so it is sometime off.

The second part of the transaction, the facility would convert from a service fee type arrangement to a tip fee type of agreement and there would also be certain commitments on waste delivery. So again we think it’s a terrific win-win solution, sustainable, predictable long-term waste disposal for clients and a new contract structure that supports our investment in an environmental upgrade that – its going to be terrific for the community to create jobs, improve air quality, but it also secures the long-term future of the facility for Covanta. So we’re working hard to complete it and if we do finalize the contract we will be sure to let you know and hopefully that will be soon.

Daniel Mannes - Avondale Partners, LLC

Sounds great. And then one quick follow-up on the two development projects. Just want to make sure, has there been any schedule change? I know in the past you talked about the Merseyside award potentially during the second quarter and then – so if you can give us a schedule update there and then just walk us through real quickly the terms on the financing and new contractor on Dublin, that will be helpful.

Anthony Orlando

The Merseyside bid is – it’s been pushed back a few weeks, we’re originally, we’re hoping for late second quarter, it looks like now it’s going to be the summer. So that’s – we’re responding to our clients schedule and eager to get to the point where we’ve a decision, but the current timetable looks like the summer. I don’t know …

Sanjiv Khattri

Fairly quickly – good morning, Dan, looking forward to going on the road with you next week. I think broadly speaking, the financial terms are not going to be too different, sort of classic non-recourse project finance. For both the projects, we’ll make a determination – the Board will make a determination on whether we need equity partners. These are nice projects. The issue with Dublin is not the actual project. I think, Tony, Matthew and the team have done a great job in getting us to where we are. The question is whether the whole Euro land situation and all the Euro issues make it impossible to do the projects.

So it’s kind of the macro environment, not the microenvironment of the project. But it will be a standard project where the parent will put equity and the local debt will be non-recourse. So, we’re flagging it and sort of just to expand a bit also on the question, when it was asked the whole purpose of sort of rather than talking about failure or success, the goal is from a financial planning point of view is to create some financial flexibility. And once you’ve that flexibility you’ve all these options. And then if you’re in a very good position to address both success or failure in any single strategy. And we’re all obviously working hard towards succeeding and confident that we’ll.

Daniel Mannes - Avondale Partners, LLC

Great, thanks.

Sanjiv Khattri

Thanks, Dan.

Operator

Thank you. Your next question comes from Scott Levine with JPMorgan.

Scott Levine - JPMorgan Chase & Co

Hi. Good morning, guys.

Sanjiv Khattri

Good morning, Scott.

Anthony Orlando

Good morning.

Scott Levine - JPMorgan Chase & Co

Just a quick question on special waste initiatives, it sounds like you’re expecting modest improvement here back-half loaded and then a ramp into 2013. I was wondering if you could talk about and help us understand the business environment and demand levels within the waste streams that you’re serving and how those are trending relative to your expectations and help us understand just the business environment relative to internal initiatives you’re ramping up, the various services that you’re providing now.

Anthony Orlando

Sure. Again, I think as we’ve said, the general waste environment continues to be fairly challenging, but what we see is a great opportunity as more and more companies are driving improved recycling and reduced packaging and ultimately trying to look to solutions that will find zero landfill alternatives, and that’s what we really think we can fit a nice niche need for various companies that want to achieve that goal. And so we see a nice opportunity to kind of ramp that up.

Historically, our special waste business has been more targeted on hard-to-handle waste; we still pursue that and see that business growing as well. But there is the kind of going after the zero landfill alternatives is kind of a new part of the business and we think there are some real nice opportunities to grow that over time. Today, it’s a very small part of the business, but we think it’s got some great growth prospects.

Scott Levine - JPMorgan Chase & Co

Understood. One follow-up, really quickly on pricing, it sounds like things are competitive within the Northeast. But would you say the pressure is [stable] – is it intensifying, is it lessening, what are your expectations, and what are you seeing there?

Anthony Orlando

We’ve been in this business for long time and it’s always a competitive environment. I think it’s going to continue to be a competitive environment, and what we’re seeing though, the big picture trends that we’re seeing really starting with the economic downturn in 2008 is, that there is a softness in the market. And I expect that’s likely to continue for some time, but we think we’ve got a great competitive advantage with the location that we have. Our facilities are, generally speaking, very close to where the waste is generated, and of course most of the landfills, the lion’s share of their cost is in transportation and as they pass-through fuel surcharges that works to our advantage. So, we feel like we’re in a very good position there.

Scott Levine - JPMorgan Chase & Co

Got it. Thanks for the insight.

Sanjiv Khattri

Thanks, Scott.

Operator

Thank you. Your next question comes from Michael Hoffman with Wunderlich Securities.

Michael Hoffman - Wunderlich Securities, Inc

Good morning all.

Sanjiv Khattri

Good morning, Michael. Sorry I missed you on the follow-up last night; we’ll catch-up after the call.

Michael Hoffman - Wunderlich Securities, Inc

Look forward to it, Sanjiv. Thank you by the way for the added transparency on the electricity part of the business. I think that’s helpful for the market. On that vein, if you look at where your plans are concentrated and then seasonal moves in electricity, regardless of whatever nat gas is doing, there is a fairly good probability that rates go up fair amount just kind of June to September because of weather issues, with the summer air conditioning, maybe they won’t be as extreme as they were last year because of the severe heat we had. But how does that factor into your thinking about your electricity revenues and the guidance and what have you?

Anthony Orlando

That’s all built in. When we -- and again, we’re using -- natural gas is kind of a proxy for electricity because it is still the biggest driver. By no means this is the only driver that – and I guess as natural gas prices get lower and lower, actually the electricity prices tend to disconnect a little bit more from the natural gas price. But currently natural gas is trading around two bucks, so when we’re talking about that 250 for full-year season, that already factors in, that it’s going to move up during the summer and move down during the shoulder months. So that’s really already built into the numbers.

Michael Hoffman - Wunderlich Securities, Inc

Okay. And that’s what helps, when you look at spot rates today and how can you possibly hit a target, that’s what help that is that there is…

Anthony Orlando

Yeah.

Michael Hoffman - Wunderlich Securities, Inc

… some low activity that belies some of the spot numbers that we’ve seen in the market?

Anthony Orlando

Yeah. And as you’ve said, weather will have a big influence just like the extremely mild weather we had during the winter had a big influence on pricing to the downside. It remains to be seeing what weather conditions are like over the summer. If it’s real hot, that’s going to have an influence, if it’s mild summer that will have an influence. So, weather conditions still play a relatively big part in the electricity pricing because of relative lack of storage in natural gas.

Michael Hoffman - Wunderlich Securities, Inc

Right. And then, moving back over Europe for a second, I’ve got a couple of follow-up questions. We’re under the impression there is some big chunks of waste volume coming into the market for bid that would have influence on in the Merseyside market that you would be building that project in. Can you talk about sort of, one, is that true, and two, is your sort of strategy with regards to those big chunks?

Anthony Orlando

The facility that we’re planning to build there is what we referred to the Ince Park project; client represents roughly half of the waste volume into that plant. We’re very strategically located with that plant because we’ve road, rail and barge access to the plant, which we think is a great competitive advantage in addition to the fact that it’s a very large plant, which also gives us a nice competitive advantage.

So we think we’re really well positioned to fill up the other half of that plant capacity both with commercial waste, either rail or road and as you mentioned, there are also a number of attractive municipal contracts that are likely to be bid soon there as well. So, we think we’re in a nice position. But the first step really is our anchor tenant there, which would be the Merseyside contract is crucial for our success.

Michael Hoffman - Wunderlich Securities, Inc

Okay. Are some of those bigger residential contracts coming up for bid before Merseyside would let its bid known?

Anthony Orlando

It appears that likely it will be a little bit later.

Michael Hoffman - Wunderlich Securities, Inc

Okay. And then, is there an advantage to going to 45 years versus I think it was 25 with Dublin, when you go to the debt market, does that make them more comfortable about why they should finance us?

Sanjiv Khattri

Michael, I think we should – no comments on the actual contract. At the right time, I think we will share. There is a lot of stuff out in the press. As Tony highlighted, we’re from a project point of view we’re excited about the project. The issue is the capital market and Irish economy rather than the project.

Michael Hoffman - Wunderlich Securities, Inc

Okay. And then Tony can you fill us in on what your thoughts are about the timing of New York City finally committing to long-term disposal agreements?

Anthony Orlando

Sure. You know, New York City has been in a fairly long bid process for additional waste disposal. We’ve been engaged in that bid process for quite sometime. We believe we’re in a competitive position and, but ultimately its New York City’s decision as to how, if, and when they decide to award a contract and we hope – obviously, we hope to be awarded a contract. And if that happens, we will let you know.

Michael Hoffman - Wunderlich Securities, Inc

And I was more focused on, have they given any indication about the timing at this point of their process?

Anthony Orlando

That’s about – this bid process is been going on for quite sometime and hopefully New York City is the one that’s going to decide and I’m not going to try to predict what they’re going to do until they actually make a decision.

Michael Hoffman - Wunderlich Securities, Inc

Okay. And if I could, a couple clarity questions, when you talked about metals and percent changes, were you talking about volumes or dollars or revenue?

Anthony Orlando

Well, we talked actually about both. We talked about the volume pickup quarter-to-quarter. On ferrous volume pickup is 9% and price pickup was 9%, so that may be a little confusing. They were both up 9%. The non-ferrous pricing was down a little bit and our volume pickup there was 15%.

Michael Hoffman - Wunderlich Securities, Inc

Okay. I just want to make sure I understood that. And then, I’m using 23 millionish for the interest expense 2Q, 3Q, 4Q, is that the right thing to do there Sanjiv?

Sanjiv Khattri

Michael, I’ve said on my call I think the $25 million zip code …

Michael Hoffman - Wunderlich Securities, Inc

Okay.

Sanjiv Khattri

… probably a good number for cash expense. Book expense – excuse me, the cash flow is a bit lumpier because of the timing of the high yield, but sort of cash related interest expense for the year per quarter. Again, we draw down more revolver or have floating day rate exchange, that changes, but that’s sort of a good zip code.

Michael Hoffman - Wunderlich Securities, Inc

All right. And then if $10 million to $15 million a quarter for construction revenue is a good number and then the offset being 35 to 40 in other operating expense, is that a good …?

Sanjiv Khattri

We can take you through this offline. I think to predict exactly how much construction run rate is, is difficult to do. We’ve got one project in the final stages, one project ramping up. To sort of give you some sort of a [straight] number would be highly – I mean, it’s lumpy. Cash flows are lumpy and even some of the activity is lumpy, for a while we will have two full projects going and one will finish and so I’d caution you against trying to develop a rule of thumb.

And also quickly on metals, I mean, there are three variables of quantity, quality and price. Price is holding up and as Tony said, the team is doing an awesome job on quantity and quality.

Michael Hoffman - Wunderlich Securities, Inc

Okay. Thank you very much.

Sanjiv Khattri

Thanks, Michael.

Operator

Thank you. Your next question comes from JinMing Liu with Ardour Capital.

JinMing Liu - Ardour Capital Investments, LLC

Good morning, gentlemen.

Anthony Orlando

Good morning.

Sanjiv Khattri

Good morning, JinMing. How are you?

JinMing Liu - Ardour Capital Investments, LLC

Yeah, just couple of question related to energy price. Can you remind us about what is your average contract in the hedge energy price for 2012?

Unidentified Company Representative

I don’t think we’ve given the – in fact hedge price.

Anthony Orlando

Yeah, I don’t think we have either. So, I will take a look back at the documents, but the hedged and contracted price are going to be consistent with what it has been because they’re hedged and contracted and at fixed rates and obviously we have seen a dip in the exposed price I think if you look back to the last call, we talked about an average in the low 50s and now we said its about 50.

Again, remember in our exposed power markets we got at about half of that relates to one of three more attractive markets. One is Long Island where we get better pricing, one is Hawaii where we get better pricing and the other is steam contracts where we get better pricing. So, the average 50 on that exposed power may seem – it sounds a little bit high given where prices are today, if you look at kind of the PGM market is in the 30s. But that’s because we have a number of facilities in these more attractive markets.

And again that actually played out. I mentioned the contract that we extended and new contracts that we also entered at our Niagara facility, those are for steam sales and there the steam sells at a better price than electricity because its dedicated to one client.

JinMing Liu - Ardour Capital Investments, LLC

Okay. Just my last one, you mentioned that you entered – newly entered some hedges for the shoulder month. I’m just trying to understand why did you enter some hedge position when the energy price probably – [runs] below?

Anthony Orlando

Well, this was something that we looked at. It is a little bit different than what we’ve done in the past, but we took off the table, that October-November time frame. Really quite frankly looking to protect if it turns out to be a very mild summer and gas prices are down, we just thought it made sense to kind of take that off the table. We don’t think we were given away a whole lot of upside by doing that. And so we really just want to protect those shoulder months were you can really see a dip in price.

JinMing Liu - Ardour Capital Investments, LLC

Okay. Thanks.

Anthony Orlando

Thank you, JinMing.

Operator

Thank you. I’d now like to pass the call back over to our CEO, Tony Orlando for closing remarks.

Anthony Orlando

Well, again everybody thank you for your interest in the Company and your questions. Good solid quarter on track and looking forward to talking to everybody after the second quarter. Take care. Have a good day.

Sanjiv Khattri

Thank you.

Operator

Ladies and gentlemen, thank you for joining today’s conference. Thank you for your participation. You may now disconnect.

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