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Covanta Holding, Corp. (NYSE:CVA)

Q4 FY07 Earnings Call

February 27, 2008, 8:30 AM ET

Executives

Mark A. Pytosh - EVP and CFO

Anthony J. Orlando - President and CEO

Analysts

Michael Horowitz - Pacific Growth Equities

Elizabeth Parrella - Merrill Lynch & Co.

Brian Shore - Avondale Partners

Charles Park - Findlay Park Investment Management

Operator

Good day, everyone. Welcome to the Covanta Holding Corporation Fourth Quarter 2007 Financial Results Conference Call. This conference is being recorded. At this time, I would like to turn the conference over to Chief Financial Officer, Mr. Mark Pytosh. Please go ahead.

Mark A. Pytosh - Executive Vice President and Chief Financial Officer

Thank you and good morning everyone. Welcome to Covanta Holding Corporation's fourth quarter and full year 2007 conference call. Joining me on the call will be our President and Chief Executive Officer, Tony Orlando. We will provide an operational and business update, review our financial results and then take your questions.

Before turning it over to Tony, I would like to refer you to our forward-looking disclaimer. This conference call includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. Such statements include declarations regarding the intent, belief or current expectations of the company and its management. Prospective investors are cautioned that any such forward-looking statements are not guarantee of future performance, involve a number of risks and uncertainties that can materially affect actual results as identified from time-to-time in the company's reports and registration statements filed with the Securities and Exchange Commission. The information presented includes non-GAAP financial measures. Reconciliation to the most directly comparable GAAP measure and management's reasons for presenting such information are set forth in the press release that was issued last night. Additionally, we have provided exhibits to our earnings release which will assist you in following this discussion.

I will now turn the call over to our President and CEO, Tony Orlando.

Anthony J. Orlando - President and Chief Executive Officer

Thanks Mark and thanks everyone for joining us today. I'll begin with a review of our performance and accomplishments in 2007 and then move on to the opportunities that we see for Covanta in 2008 and beyond.

This past year, we safely converted over 15 million tons of waste into clean renewable energy and once again maintain boiler availability above 90%. We received numerous environmental and safety awards. 22 of our facilities have now earned OSHA's VPP Star status for their safety programs and 23 have been accepted into the U.S EPA performance track program for environmental performance.

With respect to both of these prestigious awards, Covanta is now among the top ten organizations in the entire nation. We believe that strong client relationships are the cornerstone of our business and central to those relationships is our ability to produce consistent operating results, while maintaining the highest environmental and safety standards, and doing so every hour of every day, year after year. And that consistent operational performance also drives predictable financial results.

Let me give you the highlights. With revenue of over $1.4 billion, we generated cash flow from operations of $358 million and diluted earnings per share of $0.85, as well as adjusted EBITDA at our Covanta Energy subsidiary of $552 million, all the records for Covanta. EPS exceeded the guidance range issued at the beginning of the year, due to a lower than expected effective tax rate, while cash flow from operations and adjusted EBITDA were both within the guidance ranges. We reinvested newly all of our operating cash flow back into the business. $55 million went into maintenance CapEx, $164 million was used to pay down private debt and $134 million was used for acquisitions, equity investments and other projects to grow the business.

In February of last year, we completed a recapitalization of our balance sheet, which significantly lowered our interest expense and created financial flexibility that will enable us to pursue growth opportunities. In light of the current turmoil in the financial markets, the timing of the recap in early 2007 could not have been better and we believe that our strong financial position now provides us with a valuable competitive advantage, as we pursue growth opportunities around the world.

We executed on all aspects of our growth strategy in 2007 and remain confident that we are on the right path. Domestically, we seek to maximize the long-term value of our existing portfolio by pursuing contract extensions and enhancing the economics of our facilities after the initial contract terms. In addition, we are looking for opportunities to further expand our energy from waste and renewable energy capacity through facility expansions, acquisitions and greenfield opportunities.

I am happy to note that we recently agreed to a 25-year extension of our waste contract with the town of Hempstead, which had been set to expire in 2009. This contract represents $1 billion of waste disposal fee revenue over its life, providing us with predictability, while continuing reliable cost competitive waste disposal for the town.

We completed construction of the $100 plus million expansion of the energy from waste facility in Lee County, Florida, increasing capacity from 1200 tons per today to over 1800. We also began construction of the Hillsborough County, Florida expansion which is expected to be completed in 2009.

We also entered into a ten-year agreement with the Harrisburg, Pennsylvania Authority to maintain and operate their 800 ton per day facility. A few weeks ago, all conditions to this contract were satisfied and we are now working to improve the facility performance with needed investments. We'll advance capital to complete the improvements and we expect that the facility will be ready for operations, consistent with our typical standard in the spring of 2009.

On the acquisition front, we acquired the operating business of EnergyAnswers, adding two waste from energy... waste-to-energy facilities in Massachusetts, with a combined capacity of about 640 tons per day. We've also added five transfer stations, three are in New York and two are in Massachusetts. The total capacity of these assets is 3000 tons per day and a strategic location complements our existing market footprint, enabling us to maximize the operational efficiency of our existing portfolio and the profitability of our merchant volumes.

To expand our renewable energy portfolio, we acquired two biomass energy facilities and a biomass fuel management business located in California. We are currently making investments in these facilities in order to increase their production and environmental performance. This transaction is a great example of how we can bring our unmatched experience and operational expertise to bear, to create value with existing underperforming assets.

Now with six facilities, we are the largest biomass electricity generator in California. Overall in 2007, we increased our domestic energy from waste capacity by 5%, our renewable electricity capacity by 10% and our transfer station capacity by over 50%.

Internationally, we made some very important initial steps towards our ambitious growth targets in Europe and Asia. As we announced in September, we entered into definitive agreements for the development of a 1700 metric ton per day, 56 megawatt energy-from-waste facility in Dublin, Ireland. As a critical component of their waste disposal strategy, this is an important and high-profile project, which will significantly elevate our presence in the European marketplace.

We are now working closely with the Dublin City Council to complete permitting of this world-class facility and we expect to begin construction by the end of this year. In China, we entered into two joint ventures, our Sanfeng Covanta JV with Chongqing Iron & Steel, which was completed early last year and a joint venture of the Guangzhou development industrial holding, which we expect to be completed early this year, once government approvals are in hand. The Sanfeng Covanta already has equity interests in two 1200-ton per day energy-from-waste facilities and we are currently involved in bids for additional facilities through both of our joint ventures.

As discussed previously, our strategy in China is to form partnerships with strong Chinese entities that bring established local and regional relationships, a strategy which we believe with best position Covanta for success in bidding for new municipally-sponsored facilities.

While we are very pleased with our accomplishments in 2007, we strongly believe that our best days lie ahead. As the world searches for ways to deal with global warming, to produce more renewable energy and to provide sustainable waste disposal, we believe that energy from waste will be part of the solution for all three of these challenges. Energy from waste is a net greenhouse gas producer. Using the EPA's model, it is estimated that every ton of waste sent to an energy-from-waste facility instead of a landfill, reduces greenhouse gas emissions by one ton. By reducing the amount of waste that is buried in landfills for future generations to deal with, we not only preserve valuable land but we also avoid the generation of landfill methane, a greenhouse gas that is 20 times more potent than CO2. And energy from waste is a renewable source of electricity, offsetting the need for fossil fuel power plants.

After recycling, the world still has to deal with huge quantities of residual waste each year. And outside of Western Europe and a few other advanced countries, the most common disposal method today is land filling, with an estimated 1 billion tons of waste buried each year. Thoughtful leaders around the world are beginning to look for more environmentally sustainable ways to deal with society's waste and energy needs. As a leading energy-from-waste company in the world, the opportunity for us to be part of the solution to these global issues is significant.

In Europe and China, specific policies and regulatory requirements will drive significant growth in energy-from-waste in the coming years. In Europe, the EU landfill directives, compelled the member countries to reduce their land filling by 65% by the year 2020. Our development efforts in Europe are primarily focused on the UK and Ireland, where we estimate that approximately 10 million tons of new energy-from-waste capacity will be built in order to comply with the directive.

Our Dublin project is a perfect example of this opportunity. In the UK, we're currently involved in several bid for energy-from-waste capacity already and we expect to participate in competitive tenders for 15 to 20 new projects over the course of the next five years.

In China, which currently generates almost 300 million tons of waste annually, the central government has established a national plan, whereby the use of energy from waste is targeted to grow from a very small percent of waste disposal to 30% by the year 2030. As a result, it is expected that 40 to 50 million tons of capacity requiring over 100 facilities will be constructed by 2020.

In conjunction with our local partners, we plan to vigorously pursue these opportunities. The size of this market offers meaningful potential, but it is important to note that because of local conditions and our minority ownership position it will take many more projects in China to deliver the same financial impact as one plant in the U.S or Europe.

While the U.S currently lacks the policy drivers that exist in Europe and China, higher energy prices and greater environmental awareness are beginning to shift the tide in our favor here as well. Our expansion of the facility in Lee County, Florida represented the first new energy from waste capacity to come online in the U.S in over a decade. And in addition to our current expansion of the facility at Hillsborough County, several other client communities are considering expansions. Furthermore, for the first time since the early 1990s, municipalities are considering new facilities in the U.S and Canada and we're currently involved in the bidding process for several of these opportunities.

In order to capitalize on the tremendous opportunities that we see, both domestically and internationally, we have been extending our business development capabilities in our home office, as well as in our offices in Birmingham, England and Shanghai. While this investment in growth represents increased cost that will be reflected in our near-term financial results, we're optimistic that it will pay substantial long-term dividends. Our goal for Covanta is quiet simply to continue to be the leading energy-from-waste company in the world, and leading doesn't just mean the largest. It means the company that leads in new technology and environmental performance, as well as operational excellence and customer service. We believe that leading in this fashion enables us to create significant value for our shareholders.

Now let me turn it over to Mark for a review of the financial results.

Mark A. Pytosh - Executive Vice President and Chief Financial Officer

Thanks Tony. Total operating revenues for the fourth quarter of 2007 grew 24% or $395 million. Net income was $72 million or $0.47 per diluted share, which was benefited by a lower-than-expected tax rate driven primarily by the release of evaluation allowance previously recorded against the NOL. Using a 40% tax rate and excluding the positive impact of insurance recoveries associated with the buyer of SEMASS facility, fourth quarter EPS would have been $0.26. Cash flow from operations was $98 million, adjusted EBITDA was a $155 million at Covanta Energy.

Now, we will discuss our results for the fourth quarter compared to the previous year. In the domestic business, total revenues for the fourth quarter increased by $55.2 million or 19%. Of the $55.2 million increase, $32.6 million came from the existing business and $22.6 million came from the contribution of our new businesses. Total domestic waste and service revenues increased by $25.7 million or 12.3% to a total of $234 million which breaks down as follows:

Revenues from service fee plants increased by $5.8 million due to contractual escalations and the addition of the Harrisburg facility, partially offset by a reduction related to lower debt service pass-through revenues. Revenues from 50 facilities increased by $16.3 million, primarily driven by contractual escalations and revenues from the two facilities added with the EnergyAnswers acquisition completed on October 1st, as well as the Holliston transfer station which we acquired on April 30th.

Other waste and service fee revenues increased by 3.6 million, primarily due to higher pricing for recycled metal. Electricity and steam revenues increased by $7.7 million or 9.5% due to the higher energy rates in the existing business, a contribution of 7.8 from the acquisition on July 16th, from the two biomass facilities from AES and the EnergyAnswers acquisition, which was offset by comparative... for comparative purposes by am energy rate settlement in Massachusetts of $3.7 million reported in the fourth quarter of 2006.

Other operating revenues increased $21.9 million primarily as a result of the construction revenues earned from the expansion of the Hillsborough County facility. Domestic plant operating expenses increased by $8.1 million. Plant operating expenses in the existing business decreased by $14.7 million due to high comparative spending levels in the fourth quarter of 2006. However, this was offset by an increase of $22.7 million from the contribution of the new business activities.

For 2007, seven domestic plant operating expenses were up $52 million overall, with approximately $42 million on the increase resulting from new business activities. We expect that plan operating expenses will escalate at CPI-type inflation for 2008 as a whole, but will be heavier in the first quarter this year than they were in the first quarter of 2007, which is more in line with our normal seasonal trend. Other operating expense increased by $20.3 million primarily due to costs related to construction of the Hillsborough County facility expansion.

Now, turning to the international business. Total international revenues increased by $22.8 million driven by a $24.3 million increase in revenues under energy contracts of the two facilities in India, due to high electricity generation partially offset by the sale of Linan coal facility in China during the third quarter of 2007. International plant operating expenses increased by $16.3 million, primarily due to the higher generation of the two facilities in India, partially offset by the sale of Linan facility.

At the consolidated Covanta Holding level, general and administrative expenses for the company increased to approximately $22 million in the fourth quarter of 2007 from $19.4 million in 2006, driven by higher costs related to our growth initiatives. We recorded insurance recoveries related to repair and reconstruction resulting from the SEMASS fire of $4.9 million in the fourth quarter. We have now recorded the recovery of nearly of the $80.3 million in asset write down that we took in the first quarter of 2007.

The overall negative impact of the SEMASS fire including lost revenue on 2007 adjusted EBITDA and cash flow from operations was approximately $8 million, about half of that was covered under business interruption insurance net of our deductible and we expect to recover that $4 million in the first half of 2008. Total debt service decreased by $11.6 million to $26.1 million in the fourth quarter of 2007, primarily due to the recapitalization which was completed in February and lower project debt balances outstanding.

There was a $3.9 million increase in equity income primarily due to the contribution from our Quezon Project in the Philippines. Diluted earnings per share were $0.47 in the fourth quarter of 2007 which included a net benefit of $0.02 relating to the insurance recovery of SEMASS. Assuming a 40% tax rate and excluding the positive impact of the insurance recovery, EPS would have been $0.26 in the fourth quarter of 2007 versus $0.08 in 2006. Our full year effective tax rate was 21% and we recorded a net income tax benefit in the fourth quarter. As I mentioned, the tax rate for the quarter and the year was favorably impacted by the release of a valuation allowance previously recorded against the NOL.

For 2008, we expect the effective tax rate to be approximately 40%, but it will likely remain volatile due to movements in the NOL. Our net cash taxes were approximately $20 million in 2007 and are expected to rise by several million dollars in 2008.

We had unrestricted cash of $149.4 million at December 31. Total corporate debt including the convertible debentures was $1.02 billion. Project debt declined during the quarter by $80 million to $1.28 billion. Net of restricted funds set aside for project debt principle repayment of $227 million, as well as unrestricted cash total net debt for the company was $1.92 billion.

Now turning to our operating cash flow. Cash flow from operations for 2007 was $358 million, up $47 million from last year. The company's investment for cash included maintenance CapEx of approximately $55 million, $18 million of CapEx related to fire damage at SEMASS and a $134 million of growth capital for acquisitions, equity investments and upfront development related to acquisitions. The company made a $164 million of scheduled project debt repayments in the year, in part utilizing $37 million of net cash released from restricted funds.

Now, I would like to turn to 2008 guidance. The company is instituting guidance for the following key metrics. Adjusted EBITDA in the range of $550 million to $575 million; diluted earnings per share in the range of $0.90 to a $1 and that incorporates an effective tax rate of 40%, and cash flow from operations of $380 million to $420 million. The guidance does not incorporate any contribution from new acquisitions in 2008 and is now being given entirely for Covanta Holding going forward.

Key drivers for the expected increase in adjusted EBITDA for 2008 over 2007 are as follows: Growth in the existing domestic business, including contract escalation is expected to add $15 million to $20 million. The incremental contribution form acquisitions completed in 2007 is expected to be approximately $15 million. The increased overhead cost to support external growth and development activities that Tony discussed is expected to increase by approximately $10 million versus 2007. And the exploration of the Indianapolis contract in 2008 will result in a one-time negative impact of approximately $8 million.

For this contract, the final debt principle payment will be funded out of restricted funds already on our balance sheet, not by the client. So, we will record no further adjusted EBITDA related to debt principle. However, because the payment will be funded from restricted cash, it has no impact on our cash flow available to fund growth. This impact to reported adjusted EBITDA for this contract is typical of what we will see from other service fee facilities in future years.

Earnings per share for 2007, excluding the loss of extinguishment of debt related to the recapitalization, the SEMASS fire and utilizing a normal tax rate of 40% would have been $0.80 per share. For 2008, at the midpoint of guidance, diluted earnings per share are expected to increase from this level by approximately 19% to $0.95 driven by higher operating earnings and lower interest cost. Cash flow from operations is expected to increase by approximately $40 million from 2007 to the midpoint of the guidance range of $400 million. This increase is driven by growth in adjusted EBITDA and lower debt service cost, offset by higher expected cash taxes.

Maintenance CapEx is expected to be approximately $60 million in 2008 versus $55 million in 2007 with the increase due to the acquisitions of the biomass and EFW facilities that Tony described in 2007. Therefore, cash available to fund growth or pay down debt is expected to be approximately $35 million to $40 million higher in 2008 at the midpoint of guidance versus 2007.

With that, we look forward to answering your questions. Mark, if we could open up the phones lines for Q&A.

Question And Answer

Operator

Thank you very much. [Operator Instructions]. Our first question today comes from David [Inaudible].

Mark A. Pytosh - Executive Vice President and Chief Financial Officer

Hello sir, is someone on the line?

Anthony J. Orlando - President and Chief Executive Officer

David, hello. Mark, let go on to next question.

Operator

Just one moment, please. David? Mike Horowitz.

Anthony J. Orlando - President and Chief Executive Officer

Hey Michael.

Michael Horowitz - Pacific Growth Equities

Hi.

Mark A. Pytosh - Executive Vice President and Chief Financial Officer

Hi, good morning.

Anthony J. Orlando - President and Chief Executive Officer

Hi Michael.

Michael Horowitz - Pacific Growth Equities

Good morning. Hi, Tony. Why don't I start on the Hampstead expansion... so, you said 25 years and that's for the tipping fees. Are you doing something like the power purchase agreement or how do we look at that?

Anthony J. Orlando - President and Chief Executive Officer

Yes, let me maybe give a little bit more fulsome overview of Hampstead. Certainly its an important contract for us. We are very pleased to have extended the contract with our host community in the town of Hempstead for 25 years. That represents about 50% of the waste disposal capacity of the plant, which is about one-third of the revenue stream and the fact that we have entered into such a long-term agreement really gives a nice predictability and stability for both Covanta as well as our client community.

Regarding the other half of the waste disposable capacity, we are certainly very confident in our ability to fill the plant at good fair market prices, given the market on Long Island is particularly good for us. On the electricity revenue which is the final third of the revenue for the facility, the power contract will also be ending in 2009. That contract that we have today is slightly above market. It is hard to predict, of course, where that will be when it does a roll-off contract. But our current expectation is that we are going to sell it into the market. It's a very liquid and active market there in New York. And of course, the other important factor is that at the end of 2009, we will have paid off project debt. So, when you put all that together, what does it mean?

I think in short, we are really exited to have a debt-free asset, producing renewable energy and a great market on Long Island. The energy prices will be a big driver ultimately of our cash flow and profitability. But barring... by dropping energy prices, we would expect the cash to be distributed up from that project after debt service to be equal to or greater than they are today after 2009.

Michael Horowitz - Pacific Growth Equities

So, to be clear you are going to now let that energy flow?

Anthony J. Orlando - President and Chief Executive Officer

That's probably what we are going to do. But, time will tell. I think one of the advantage that we have of having a project that does not have debt service is that we can look to maximize the revenue by selling it to the market. We may decide to lock prices, such as we have done with some of our current projects to flow. We will often lock them a year ahead of time. So, we'll make those decisions as the time comes, but we don't think that we're going to do a long-term energy contract for a number of reasons. Maybe we just don't think it's the most prudent and the market with discount of prices that we would get, if we decided to go to a long-term contract.

Michael Horowitz - Pacific Growth Equities

Okay, great. And then one question, in the UK, on the Middlewich proposed site, it does seems to be some.... there have been some news articles over there of course, some people don't want an incinerator in their town. But I suspect that those are the kind of situations you deal with all over the place. But even with the UK mandating away from landfill, how does this kind of situation play-out and what are the things going on in the UK. It appears that I read more about it in the press over there than you guys are talking about it?

Anthony J. Orlando - President and Chief Executive Officer

Well, you look, kind of take a step back big picture on the market. The UK still relies predominantly on landfill for its waste disposal. They have to commit the compliance with EU directives, the 65% reduction by 2020 we talk about frequently, but there are also intermediate steps of reductions in 2010 and 2013. The regulatory framework and the government is certainly supportive of energy-from-waste as well as increased recycling in order to reduce land filling. In fact, Gordon Brown not long ago at a conference talked about the need for increasing waste energy.

So, there is, clearly from the municipal level and the top-down level both the regulatory drivers and the acknowledgment that waste energy makes sense. Now, one of the challenges I think in any type of development and certainly the cases through for building a waste energy facility, you must go through a process to fully explain and educate the local community in terms of the benefits that we can provide and what our process is all about. So, certainly there are people, often as you said and we're accustomed to it that will object to a facility locally. So, but that's just part of the process, that we and our client communities need to deal with. We... as we said, we are looking at 15 to 20 bid opportunities over the course of the next five years there. And we are active today in a number of opportunities and in fact advancing nicely. And so there are fair amount of news articles and coverage, because these are important projects to the local communities. But, for us, part of what we are doing to grow the business, we recognize that it will take patience on the bid process there, takes a couple of years to go through the bid process. So, we would really not expect to see any awards made on activity that we started last year, until 2009.

Michael Horowitz - Pacific Growth Equities

Okay, great. And then one last question. I know it is a small company but, there is an announcement being by Global Energy a couple weeks ago, which appears to be in line with you, doing small little joint ventures or at least experimenting with other technologies using waste streams. Can you explain the significance of that if any and then some other things that you might be looking outside of traditional municipal solid waste energy?

Anthony J. Orlando - President and Chief Executive Officer

Sure, good question Michael. We are constantly looking at new technologies to complement our existing business. Our focus and mission is to be a leader in making a good clean energy from waste. And so, one of the things that we do in addition to looking at technologies, such as the new a low NOx technology that we've rolled out in 2007, if you look at technologies that can also convert waste into energy. And we've looked at a number of them, and we think that this particular technology does show some promise but what we ends and we have ordered one facility and we've reached an understanding with how we would move ahead with global energy. And the next step for us is to install this pilot project and determine how we will operate in a scaled-up fashion and determine its commercial viability. So, it's going to... and that process will probably take us, I'd say about a year and we will see where it goes from there. We are going to continue to look at technologies and explore how we can complement and grow the business in the future.

Michael Horowitz - Pacific Growth Equities

Are there opportunities in the U.S to acquire other waste stream energy plants? I know you did one waste stuff last year, but are there other large opportunities to bolt-on or a lot of these things small to begin with?

Anthony J. Orlando - President and Chief Executive Officer

Well, in terms of acquisitions directly in the waste energy space, there may some couple of plants here and there that we've talked about. It is certain one of the things that we will be talking to our client in Harrisburg about the potential to acquire that facility. So there may be some one facilities here and there directly in the waste to energy space, as well as in the biomass space that we will be looking at. But I don't necessarily foresee any big sizeable opportunities in the U.S.

Michael Horowitz - Pacific Growth Equities

All right. Great, thanks gentleman.

Anthony J. Orlando - President and Chief Executive Officer

Mark, next question?

Operator

Yes, next question. We hear from David Hyman with Bank of America.

Anthony J. Orlando - President and Chief Executive Officer

I think we're striking out with that one Mark. Let's move on to the next one.

Operator

Next is Elizabeth Parrella.

Elizabeth Parrella - Merrill Lynch & Co.

Thank you. If you can just go back to comments on Hempstead, I wanted to try to understand a little bit better. You mentioned I think, cash flow, the distributable from the project would be at least as strong, under the new contract as it is now. But with the elimination of debt service, shouldn't it be, better or is the implication of the waste fee... the waste disposal fee for the town of Hempstead was lower. Just trying to understand that a little better the dynamics of how that worked out?

Anthony J. Orlando - President and Chief Executive Officer

There are a couple factors. The debt service is going away. The energy contract that we've today is above the market. And so that one of the factors which now of course energy prices may rise between now and the end of the contract, but based on what we see today, we are slightly above market. We also did in terms of our contract the with host community, we've shared some of the benefit of debt service going away, and so that also has an affect on the bottom line.

Elizabeth Parrella - Merrill Lynch & Co.

How should we be thinking about this from an EBITDA perspective?

Mark A. Pytosh - Executive Vice President and Chief Financial Officer

What I would say, let me add to that. I think the driver there in terms of the affect on EBITDA will driven by the electricity. That's... the biggest variable is going to be electricity pricing. I think as Tony said, we are above today. Depends on what happens for the next two years or year and a half and so a lot is going to depend on where that price is at the time and that will drive whether we are the same, or below where we are today.

Elizabeth Parrella - Merrill Lynch & Co.

Okay.

Mark A. Pytosh - Executive Vice President and Chief Financial Officer

Right now, marking of the market today, we would be below.

Elizabeth Parrella - Merrill Lynch & Co.

Because of what is happening on the energy side?

Anthony J. Orlando - President and Chief Executive Officer

For the energy side.

Elizabeth Parrella - Merrill Lynch & Co.

And is it fair to think that waste disposal fee is comparable to what it was under the old contract? I read that there were some changes also in how you are going to handle certain costs at the plant like ash --

Anthony J. Orlando - President and Chief Executive Officer

Yes, there's number of factors with ash disposal and what not. I think when you try to blow it down in its simplest form, we did share some of the benefit of the debt service going away with our client community.

Elizabeth Parrella - Merrill Lynch & Co.

Okay. And Tony you mentioned, you are participating in various RFPs in the U.S and Canada. Can you give us an update of, which ones are still active? Have any been decided? I think there was a small in Hawaii decided, and the kind of time frame on these?

Anthony J. Orlando - President and Chief Executive Officer

The ones that I think are most active that we are working on are the two in Maryland. Both of these opportunities started I guess about a year ago now, and have been two communities there continue to debate how they want to handle this and continued to move forward and advanced the waste energy project. One is in the Fredrick County, Maryland the other is Hartford County, Maryland. It looks to us as though the communities are going to make some decisions to move forward this year. But again these are decisions that the communities will have to make, but all the indications are as they continue to advance those projects. We are also seeing some activity in the Toronto area, where the community is in the process... the very first stage of the process were to request for qualifications. It is now going to be looking to put together bid documents.

So that may be about a year behind where the process is in Maryland. And we are just, we clearly seeing more and more interest with expansion opportunities. The higher energy prices and I think the environmental awareness of the benefits of waste energy continue to promote this year in the U.S. We don't have the regulatory drivers that we have in the EU and China. So we will see how things play out. But we continue to be optimistic there as well.

The project you that mentioned in Hawaii is a very small project on the Big Island of Hawaii. And I am not quiet sure the status of where that stands but I am not... that's not the one that we are particularly active in. We are however in Hawaii talking to our client community about the potential of expanding that facility.

Elizabeth Parrella - Merrill Lynch & Co.

Do you think in terms of expansion in general, could we see some thing gel on an expansion project maybe even before one of these kind of greenfield projects that are under discussion in Maryland and ultimately Toronto occur. You know is that more likely to may be hit first or --?

Anthony J. Orlando - President and Chief Executive Officer

I would say, yes, the expansions are more likely to hit first.

Elizabeth Parrella - Merrill Lynch & Co.

Okay.

Anthony J. Orlando - President and Chief Executive Officer

But there is... may be we can have a neck and neck horse rate at some point.

Elizabeth Parrella - Merrill Lynch & Co.

Okay, thanks very much.

Anthony J. Orlando - President and Chief Executive Officer

Alright.

Mark A. Pytosh - Executive Vice President and Chief Financial Officer

Thank you Elizabeth.

Operator

And we will again attempt Mr. David Hyman, Bank of America.

Mark A. Pytosh - Executive Vice President and Chief Financial Officer

I think, we need to move on...

Operator

Next we'll hear from Brian Shore with Avondale.

Brian Shore - Avondale Partners

Hi. Good morning gentlemen?

Anthony J. Orlando - President and Chief Executive Officer

Morning.

Brian Shore - Avondale Partners

Just a quick question. You mentioned the Hampstead facility. Anything on Indianapolis facility and what's the status there, as you guys look forward?

Anthony J. Orlando - President and Chief Executive Officer

Yes good question, Indianapolis is actually the next of contract for us that rolls off within late 2008. I think its December 1st or something like that of 2008. And Mark talked about some of transactions at the end of the contract. We have not yet reached an agreement with the city in terms of waste disposal. We are actively having discussions with them. We hope to know where that stands sometime very soon, but I will say that in any event, we are confident in our ability fill that facility with waste. We do have a team contract and we're optimistic about how that plays out.

Brian Shore - Avondale Partners

Alright great. And then just secondly, on Harrisburg, can you I guess give me an update on the capital improvements there and sort of I guess what the level is and I guess the project... or the process on recovering that was I guess about $10.5 million in revenues there from that project?

Anthony J. Orlando - President and Chief Executive Officer

Yes, we as I mentioned the conditions pressed into the contract becoming effective, were just satisfied a few weeks ago, which did take longer than we had hoped but, we are glad that that's done now and we're really looking forward to making the investment. This is roughly a $26 million, if I remember the number correctly, within that range $25 million of investments to essentially complete construction of the project. So that all three of the boilers at that facility will operate appropriately. Over the course of the last year, it's been really running with only two of its three boilers. So, we need to do that work. We would expect to complete that in the spring of next year and there is a provision in the contract term, where we will recover that money and it is guaranteed in fact to be returned to it by the client community.

Brian Shore - Avondale Partners

All right, great. Thank you guys a bunch and good quarter.

Anthony J. Orlando - President and Chief Executive Officer

Thank you.

Mark A. Pytosh - Executive Vice President and Chief Financial Officer

Thank you.

Operator

Next we'll hear from Charlie Park with Findlay.

Charles Park - Findlay Park Investment Management

Yes good morning. Could you just remind me what the principle payments are for both projects on the corporate debt over the next 2, 3, or 4 years, please?

Anthony J. Orlando - President and Chief Executive Officer

What we've been saying is that it will be somewhere between $150 million and $175 million of project debt payments and part of which will be paid out of cash, restricted cash it's on our balance sheet. What we told people is that net-net to the parent, it's probably in the range of $150 million a year, for the next several years.

Charles Park - Findlay Park Investment Management

And you haven't got a big principle payment on the parent debt... the corporate debt, until 2013 is that right?

Anthony J. Orlando - President and Chief Executive Officer

That's right. We don't have any near-term principal payments on that... in that for the parent company any time soon.

Charles Park - Findlay Park Investment Management

I am just sorry, missed that development costs because of bad audio, is it $10 million of extra development cost?

Anthony J. Orlando - President and Chief Executive Officer

Mark do you have?

Mark A. Pytosh - Executive Vice President and Chief Financial Officer

Yes. Its typically in our in our SG&A, you'd have escalation for salary and in costs but we are going to spending an extra $10 million in development cost, in addition to the escalation.

Charles Park - Findlay Park Investment Management

And finally just a comment that maybe just I can't remember the name of the plant in the Philippines, Quezon. Can you just say us what's going on there please?

Anthony J. Orlando - President and Chief Executive Officer

Yes. The Quezon plant is in the Philippines and that has been performing well and we had better performance there this year than last year but. Its been a consistent performer and its been distributing cash up to the parent. So, it's a good facility for us, it's a big plant. We own about a quarter of the facility. But it's a mature plant to generate cash.

Charles Park - Findlay Park Investment Management

Thank you.

Anthony J. Orlando - President and Chief Executive Officer

Mark, next question?

Operator

[Operator Instructions]. And next we would hear from Pat Ralston [ph] with Brencourt Advisors.

Unidentified Analyst

Ed Cools [ph] at Brencourt. Good quarter guys. I had a quick question, Mark there was a acquisition article about it today but I know you have talked in the past about the absorptive nature of Covanta's plants namely removing waste which would normally go on the landfills and incinerating it. And there's been a lot of discussion about ignition process and vouchers issued by independent parties and the stable credits, you know the grant from the U.S right now doesn't have a standard for trading those credits but a lot of people believe and as we have discussed that would likely change especially with issues of carbon emissions and greenhouse gases. And, I am just wondering where you guys stand on that, I know that you...I believe you had some lobbyists and then some endeavors going in Washington but this is getting a lot more pressured certainly a lot more popular and potentially from what we've seen it could lead to significant improvements in earnings and in cash flow, if and when this really starts to grab hold. I just want you to talk a bit about that?

Anthony J. Orlando - President and Chief Executive Officer

Yes, a great question it is, certainly a very important topic. This is Tony, and it is one that we are actively engaged in the debate. It may be not big as picture, I think to me without question there will be continued pressure to reduce greenhouse gas emissions. I mean you know we got the cue of the discussions post 2012. And of course in the EU, they already have regulations that require a reduction in land filling which is because of the methane gases that are emitted from landfills. How does it translate here in the U.S to existing portfolio? I think there is two big questions legislatively, one will be the Climate Change Legislation, certainly you have got the Warner-Lieberman Bill that's out here today, cap and trade seems to be the way that the people are moving and in my mind, it's really a matter of when and in what form that cap and trade takes. But there will be you know climate change regulation in the U.S.

We also have the Reg G that's working its way through. So, I think how ultimately the details of that regulation workout will determine the impact on the company. We do believe if the regulation looks out from a comprehensive perspective, looking using scientific evidence and using the lifecycle analysis that we are going to get the benefit because the EPA estimates one ton of greenhouse gas reduction for every one ton of waste that we process.

The other big factors that flows out of that is the renewable electricity standard. The drive to reduce emissions is prompting many regulatory bodies, both at the state and federal level to consider regulatory incentives for renewable energy and of course we are today defined as renewable energy in many different states. We are currently defined as renewable and the federal statutes including the in fact there tax credits up for a vote in the House today and clearly there is support for those tax credits being extended. Although it does appear as though this particular Bill will not make its way... all the way through the process because it also contains some other provisions that the President doesn't like.

So, the general dynamic I think is very favorable for us in terms of support for renewable energy and the drive to reduce greenhouse gas emissions. Ultimately, how will that plays out in a regulation to the U.S. Whether existing plants are included or is it only included for new plants. What technologies are included, that all remains to be seen. But we are actively advocating for waste energy and we will continue to do so and believe it is the right thing for the environment as well as the right thing for the economy.

Unidentified Analyst

Could I just follow up to Mark in a more of it sort of technical issue. Mark you've talked about on the call, as I was just wondering if you could maybe just clarify and forgive me if I just didn't grab it. When you first mentioned net operating loss carry forwards or what would be your cash tax... the cash tax implications for 08. Wanted to know if going forward, one of these things we as investors very much like about the company that you have such a sizable NOL and wondering if with new endeavors, new expansions, Greenfield opportunities etcetera, If you guys are being successful and sort of replenishing and making sure that suitable sustainability at that NOL kind of continues on, I know there was sort of timeframe like 09, 10 that we could count on that and just wondered if you could, I know it's a broad question, but just may be speak to the sort of sustainability and longevity of the NOLs in general and specifically what we could think about for '08? Thanks.

Mark A. Pytosh - Executive Vice President and Chief Financial Officer

Sure, sure. What I said my comment is that we paid this past year approximately net about $20 million, most of which is such as state-level tax. We don't pay much in terms of Federal. As it stands now; we have about $270 million on the books for NOL. We expect that that and some other sort of tax planning initiatives will get us through 2010, thereabout and your point is valid, I think to the extent, we start construction new capacity that would provide additional tax-shield for us. We obviously are very active in managing our tax position. We treat that like an asset, just like the rest of the business and we are going to continue to pursue achieving maximum benefits from the NOL. But we certainly would expect at least for the next... through about 2010 and again, we've got some other planning initiatives but... through at least 2010 to have a fair amount of tax-shield and the lion share of our tax bill will be state taxes through 10. So, we expect to continue to be able to utilize the benefit there and generate significant free cash flow.

Unidentified Analyst

Great. Thanks guys.

Operator

[Operator Instructions]. And at this time, there are no questions in the queue. I'll turn the conference back over to our host for any closing or additional remarks.

Anthony J. Orlando - President and Chief Executive Officer

Okay. Well, thanks everybody for joining us today. We are looking forward to a great year of 2008 and talking to you again soon. Goodbye.

Operator

And that does conclude our conference call. Thank you for joining us today.

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Source: Covanta Holding Corp. Q4 2007 Earnings Call Transcript
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