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Covanta Holding Corp. (NYSE:CVA)

Q1 FY08 Earnings Call

April 24, 2008, 8:30 AM ET

Executives

Mark A. Pytosh - EVP and CFO

Anthony J. Orlando - President and CEO

Analysts

Ian Zaffino - Oppenheimer & Co.

Elizabeth Parrella - Merrill Lynch

Daniel Mannes - Avondale Partners

Robert Renck - R.L. Renck and Co.

Operator

Thank you everyone and welcome to the Covanta Corporation's Company First Quarter 2008 Financial Results Conference Call. Today's conference is being recorded and after the prepared remarks there will be a question-and-answer session. [Operator Instructions].

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 the Covanta Holding Corporation first quarter 2008 financial results conference call and webcast. This call is being recorded.

At this time for opening remarks and introduction I'd like to turn the... Thank you and good morning. Joining me on the call today will be our President and CEO, 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. The conference call includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange 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 guarantees of future performance and 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 of the most directly comparable GAAP measure and management's reasons for presenting such information is 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 would now like to turn the call over to our President and CEO, Tony Orlando.

Anthony J. Orlando - President and Chief Executive Officer

Thanks, Mark and thanks everybody for joining us today. I am pleased with our performance in the first quarter. Operationally, we were solid again, as anticipated even during this turbulent economic environment our highly contracted base business continues to perform in a predictable fashion and we are reaffirming our previously announced 2008 guidance. In addition, I remain optimistic about our long-term growth prospects as we continue to pursue opportunities to expand our business in the Americas, Europe and Asia.

Let me just give you a quick rundown of some recent events and progress we are making in our business development efforts. In the United States, we see growing support for new ways to energy capacity from states and local policy makers. Let me cite two examples of this support.

In separate decisions elected officials of Maryland recently decided to continue pursuing two new Greenfield facilities. We are participating in a competitive bid process for both. And just last week New Jersey issued a draft energy master plan.

This comprehensive plan included the statement that New Jersey waste generation rates offer and I quote, a significant opportunity to pursue conversion of thrash into energy and fuel products. Conversion of this waste into energy will also reduce the need for future landfill development and consequently reduce the amount of methane a greenhouse gas that is emitted from these landfills. We are also seeing more concrete steps towards new capacity.

Working in concert with our client community we started the permitting process to expand the H [ph] power facility in Hawaii which we operate from the City of Honolulu. The expansion would add 900 tons per day and 22 megawatts of capacity resulting in a facility capable of producing over 5% of Waterloo's electricity demand.

We are also working on a new waste energy development project located in the Village of Gold River on Vancouver Island in British Columbia. Green Island energy has already completed a lot of work on a project and we've recently agreed to partner with them to conclude the development effort which includes the need to secure long-term waste supply contracts.

We believe that communities in the greater Vancouver area will be attracted to the project as an environmentally superior and cost competitive waste disposal option. In China, our joint venture with Chongqing Iron & Steel was selected as a preferred bidder for a new waste energy project in the City of Chengdu. There is still work to be done but we are excited because it's our first win on a competitive bid in China. Something we hope to experience frequently in the coming years.

Fortunately, there is a lot of bid activity. So we'll have the opportunity for multiple wins and that's important because as we stated before the economic impact from individual projects in China is quite small given our minority position and the lower capital cost.

Turning to Europe, the Dublin facility planning process continues to advance. In fact, this week a public hearing is being conducted on the facility permit and we hope to have final decisions from this process in time to allow the start of construction by the end of the year.

We are also advancing a number of competitive bid opportunities in the U.K. Overall I say our progress is encouraging but it's important to keep in mind that it will take time, skill and political support to develop these opportunities into successful projects. To help increase our success rate on growth initiatives, we've recently added two very talented people to our senior management team as we announced earlier this month.

First, Allard Nooy has been appointed to the position of President of our Asia Pacific business. Allard brings substantial experience working with municipal governments to develop infrastructure projects across Asia including China.

The successful track record in managing and investing in infrastructure assets makes him uniquely qualified to lead our team in this important market. Allard will be based in our Shanghai regional headquarters where he will be responsible for executing our Asia Pacific growth strategy focusing on energy from waste opportunities in China.

We also announced the appointment of Paul Gilman to the newly created position of Senior Vice President and Chief Sustainability Officer. Given the critical importance of sustainability to Covanta's future I am excited to create this senior position to bring additional focus to this area.

Paul has an impressive background in the policy making arena and in scientific research. Paul will be responsible for our safety, health and environmental programs; plus external affairs and community relations. In addition, he will work closely with our government relations and research and development teams.

I'm confident that Paul's leadership and experience will be a valuable addition to our senior team as we pursue sustainable initiatives and advocate for policies that recognize the environmental benefits of energy from waste.

In that regard lawmakers in Washington continue to actively debate climate change in energy policy. While its difficult to predict the outcome of federal legislation on these topics. It's pretty easy to agree with most experts that it is unlikely that anything will be passed until after the presidential election.

Next year however, I am optimistic that we'll see new laws on both climate change and renewable energy that should help our business given the significant benefits of making energy from waste. Namely, lower greenhouse gas emissions, fewer landfills, less dependence on fossil fuel and more recycling.

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

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

Thanks, Tony. Total operating revenues for the first quarter of 2008 grew 17.7% to $389 million. Net income was $14.8 million or $0.10 per diluted share, cash flow from operations was $49.5 million and adjusted EBITDA was $106.3 million.

Now, I will discuss our results for the first quarter compared to the previous year. In the domestic business, total revenues for Q1 increased by $35.5 million or 12.3%. Of the $35.5 million increase, $15.6 million came from the existing business and $19.9 million came from the contribution of our new businesses acquired last year.

Domestic waste and service revenues increased by $18.9 million or 9.6% to a total of $216.8 million which breaks down as follows; revenues from service fee plants increased by $2.6 million due to contractual escalations, partially offset by lower debt service pass through revenues of $1.5 million. Revenues from tip fee facilities increased by $11.9 million, primarily driven by increased volumes or revenues from the two facilities added with the Energy Answers acquisition, as well as the Holliston Transfer Station, and other waste and service fee revenues increased by $4.4 million primarily due to higher pricing for recycled metal.

Electricity and steam revenues increased by $16.2 million or 21.6% due to higher energy rates and production in the existing business and a contribution of $10.2 million from acquired businesses. Primarily the two biomass plants acquired from AES.

Domestic plant operating expenses increased by $34.8 million, the existing business contributed about half of this increase or $17.5 million. This was due to the timing of scheduled maintenance activities which were heavier during the first quarter of 2008 than 2007 as well as cost of escalations for fuel and materials.

The new business activities mentioned above contribute an increase of $17.3 million to plant operating expenses. Looking ahead to the full year, we expect that the spending in the first quarter will be the highest for the year with overall higher spending in the first half of the year than the second half which is our typical maintenance pattern.

Now turning to the international business, total international revenues increased by $23 million driven by $24.8 million increase in revenues at the two facilities in India due to higher 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 $22.2 million primarily due to the higher generation at the two facilities from India partially offset by the sale of Linan facility. At the consolidated Covanta Holding level general administrative expenses for the company increased $2 million to approximately $24.2 million in the first quarter of 2008 from $22.2 million in 2007 driven primarily by higher cost related to our growth initiatives and normal escalations. Some of that service decreased by $4.8 million to $25.8 million in the first quarter of 2008 primarily due to the recapitalization in February 2007, lower interest rate on outstanding borrowings and lower project debt balances outstanding.

Diluted earnings per share was $0.10 in the first quarter of 2008 which compares to $0.08 in the first quarter of 2007 excluding the impact of the Semass fire asset write-down and recapitalization cost. Our effective tax rate for the quarter was 40.3% this is approximately where we expected to be for all of 2008. However, it will likely remain volatile due to movements in the NOL and associated valuation allowance.

Our net cash taxes are expected to be approximately $25 million in 2008. We had unrestricted cash of $124.4 million at March 31. Total corporate debt including the convertible debentures is $1.02 billion, project debt balances declined by $53 million during the quarter to $1.23 billion. Net of restricted fund set aside for project debt principle repayment of $209 million as well as unrestricted cash total net debt for the company was up $1.91 billion.

Now turning to operating cash flow, cash flow from operations for the first quarter was $49.5 million down $7 million from 2007. A quick note on cash flow statement presentation, we've modified our presentation of cash flow from operations to include changes in restricted funds held in trust related to operating activities.

Changes in restricted funds related to debt payment will remain in the financing activity section of the cash flow statement while we had previously reflected all restricted fund changes. We believe that this presentation provides a better measurement of operating cash is ultimately available for use by the parent company. Within cash flow from operations we had approximately $26 million of cash billed on the restricted funds in the first quarter resulting in a reduction in cash flow from operations.

However, we expect these funds to be released to the parent in subsequent quarters. The company's investments of cash included may have CapEx of $29.8 million, $1.2 million of CapEx related to fire damage at Semass and $8 million of upfront refurbishment capital related to the acquisitions.

Our maintenance CapEx spending this quarter was in line with our expectations and we still expect to spend approximately $60 million for 2008. The company made $55 million of scheduled project debt repayments in the quarter in part utilizing $16 million of net cash released from restricted funds.

Now, I would like to reiterate our 2008 guidance which is unchanged. Adjusted EBITDA in the range of $550 million to $575 million, diluted earnings per share in the range of $0.90 to $1 and cash flow from operations in the range of $380 million to $420 million.

With that we will look forward to answering your questions today. Operator, can you open up the line to take questions.

Question And Answer

Operator

Thank you, sir. The question-and-answer session will be conducted electronically. [Operator Instructions]. And our first question comes from Ian Zaffino with Oppenheimer.

Ian Zaffino - Oppenheimer & Co.

Hi, good morning.

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

Good morning, Ian.

Anthony J. Orlando - President and Chief Executive Officer

Good morning.

Ian Zaffino - Oppenheimer & Co.

Just wanted to dive in a little bit in terms of the contract renegotiations. I know you have... I guess one coming up in the next probably 12 months I believe it is, and then you have a few after that. Can you give us an idea of... given the environment what you are seeing here, where the leverage is in this as far as... all right do you have the negotiating powers given where prices are now, are you able to renegotiate at higher rates. If you can give us some detail on that, that would be helpful? Thanks.

Anthony J. Orlando - President and Chief Executive Officer

Sure Ian, this is Tony Orlando. Let me just maybe talk about generally first and then I'll touch on a couple of projects that are upcoming in the near term. I think the dynamics of what's going on in the marketplace, and it doesn't affect us much in these negotiations in terms of the waste supply market because we are really looking long-term. So, it's not like the fact that the economy slows down a little bit here in the last few months isn't really affecting our negotiations because we are looking at discussions that are 5, 10 and even 15 and 20 years down the line. So both us and our client are looking for predictability on the waste disposal side. I think as we have said in the past, where we own the facilities, there is a strong mutual desire by both Covanta and our client to get together in an agreement that works well for both of us.

The infrastructure that the community is accustomed to in terms of their waste disposal, they are used to bringing their waste to our plant. They are typically the biggest waste supplier in the area. So we, very much need the support from our local client communities. So, I think the dynamics generally are the same as they've always been and that's for a very strong pole for both, Covanta and our client community to get together on a deal that works well for both of us. And that's likely to mean that there'll be, that we'll end up sharing benefits, that service going away. The energy market of course has moved in our favor and that I think benefits both parties that is going to benefit both Covanta as well as our client community. So, the dynamics are pretty much the same. As they have been with the fact that we have got a more favorable energy market that's continuing to move in our direction.

With respect to the Indianapolis contract which is the next one that comes up. In fact it's near the end of this year and now when we've already renegotiated and extended the steam contract we are in discussions with the client community for delivery of significant portion of the waste into that facility. We hope to conclude those discussions probably by the summer and... but in any event regardless what happens with the discussions with the city, we are very comfortable with our ability to secure waste flow in that area at reasonable prices.

I guess the next couple of contracts that are coming up are on facilities that are owned by the client communities, there is a facility in Detroit that's in 2009. We are in discussions there and the city has got some decisions to make. But the one is really imminent that is most significant from the company's perspective is the Indianapolis facility because that's one that we own.

Ian Zaffino - Oppenheimer & Co.

All right, thank you very much.

Anthony J. Orlando - President and Chief Executive Officer

Thanks, Ian.

Operator

And our next question comes from Michael Powell [ph] with Stanford Group.

Unidentified Analyst

Hi gentlemen.

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

Good morning, Michael.

Anthony J. Orlando - President and Chief Executive Officer

Hi, Michael.

Unidentified Analyst

How are you? So if I could dig a little bit deeper because you kind of reiterated the dynamics around China with regard to project size and of course your joint venture position over there. But can you give us some color on 2010 and beyond. What quantity actually looks like because you are alluded to multiple bids and how that multiple projects will help your economics?

Anthony J. Orlando - President and Chief Executive Officer

Well it's... the market area is huge, there is on the order of maybe a little bit under 300 million tons of waste today very little of it going to waste energy and a long-term goal I think as you know to achieve 30% of that waste going to waste energy facility. So to achieve that goal by 2030 they're going to have to be 100s of plants built. Bringing it back to a little bit shorter term we've got the one project that we mentioned in Chengdu that we've been awarded and we are working to, we are trying to finalize the arrangements there. We got one of the bid that's in and then we are probably looking at on the order of say 10 bids over the course of the next year or so. So, that's kind of gives you a sense of the level of activity.

Unidentified Analyst

Okay. Great and then in terms of financing those types of projects are you going to go ahead in aggregate projects together to make the financing more palatable and leveraging your balance sheet in China. Would you ever do acquisitions over there or what else can we do with the balance sheet now that is in this, in such good shape?

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

Michael this is Mark. Let me take that one. First of all the project is the same today it's certainly Chengdu that would be financed individually. The financing market there is generally not it's a non-recourse debt market but it's provided by local banks and so initially I think we would structure it as a non-recourse loan from the banks. I think over time as we get more of a portfolio there we'll probably look at other financing options that are what I would call little closer to project finance market terms, just in terms of maturity and structure.

So, I think that's an opportunity for us. As Tony mentioned, the individual projects, the equity checks are much smaller than the projects we are looking at say in Dublin. So, we can easily finance that from the balance sheet today plus raise the non-recourse debt from the local bank so that it will take a number of projects before that will require significant amount of capital from the parent company. But we are in a position to fund that as we go forward.

Unidentified Analyst

Are there acquisition opportunities in China?

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

Yes there... we do think overtime that there will be some acquisition opportunities and like we are considering in all the markets we will look at acquisition involved at development. There is a large amount of development opportunity there, so we are going to pursue that obviously aggressively but we do think overtime there will be some potential acquisition opportunity.

Anthony J. Orlando - President and Chief Executive Officer

Yes. So there is certainly something that we will look at Michael, but because the market is in such an early stage, there are not that many facilities out there. There are no really big players nonetheless. So, there maybe some opportunities for, acquisitions of relatively small size.

Unidentified Analyst

I know I have asked this before but there is certainly a lot of activity going on the private side here in the U.S. and during that with various feed stocks and you are in a some division because you control your feed stock and you've created multiple opportunities in last year to further control your feed stock going forward. How do you view either waste streams and how you can leverage your position in the logistics of your position to maybe create more value from those waste streams and then we talk about this and maybe some viewed as primary side. But maybe I viewed as an easier path for market rather than large scale power plant Energy from waste facilities?

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

Alright. Let me try that, we are always looking at the various alternatives and you are probably referring to global announcement. But we are looking at a number of alternatives to see if there is a way to get greater energy levels out of our more efficient or different or a way to extend our business into the municipal followed waste stream. We are looking at other waste streams. We are in the biomass business, but we've looked at other waste streams as well.

Obviously, I think the Covanta strength is we know how to handle the waste stream. We know how to run the facilities and so that's a big value component when you look at other technologies. How do you handle the waste and convert that into a fuel of some kind. So that's really our value added in addition to obviously, we have... we control a lot of waste through our facilities. But our goal would be to extend our business and try to grasp more of the municipal followed waste stream than we have today.

Unidentified Analyst

Great, thanks gentlemen.

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

Thanks.

Operator

And our next question comes from Elizabeth Parrella with Merrill Lynch.

Elizabeth Parrella - Merrill Lynch

Thank you. Could you just give us an idea on the China project, does that particular one, or let's say one is about that size 1,800 tons per day. What is the capital cost that you expect?

Anthony J. Orlando - President and Chief Executive Officer

Do you want to take that Mark?

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

Yes. The capital cost there is... we think probably somewhat between 30% and 40% of what it is in the United States. When we've told people that here it's about $250,000 per daily ton, so it would be, call it $80,000 or $80,000 to $100,000 per daily ton there. So that would be kind of the comparable measure.

Elizabeth Parrella - Merrill Lynch

Something like the $140-$150 million ballpark?

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

Probably in that zone. Maybe that maybe a little high.

Elizabeth Parrella - Merrill Lynch

Okay. And then you own 40% of the JVSM [ph]?

Anthony J. Orlando - President and Chief Executive Officer

Yes this is particularly JV. We did a project specific JV for this and will be 49%.

Elizabeth Parrella - Merrill Lynch

Okay. And Mark what kind of equity debt mix are you looking at on that?

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

We think its probably 70... 75% leverage something in that... we haven't got into that point yet on the project but the projects that are being done today are in the 70% to 75% leverage range.

Elizabeth Parrella - Merrill Lynch

Okay. And then just one other follow up on Hempstead, I know last call we talked about in fact you got a new contract on extension of the contract at Hempstead, do you think it's a primary customer that is still kind of working with some of the other mainly supplier or the use in town that are customers for the plan and I am just wondering if there is any update on that?

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

Yes, nothing concrete on the remainder of the waste supply there. But maybe just to give a quick refresher to people that maybe weren't on the call last quarter. But we are basically three large revenue streams one-third comes from a waste supply contract with our host community the town of Hempstead and that's recently been re-upped for 25 year contract. The other waste supply contracts are ending in 2009 and we are working with a number of different communities in Wong Island and hope to secure the majority of that waste but it is a very good market for waste disposal. Generally speaking on Wong Island. And then the final third of the revenue from that project which comes off from a fixed price energy contract in 2009 and our game plan now is to sell the electricity into the short term market when that contract rolls off.

Elizabeth Parrella - Merrill Lynch

Okay, thank you.

Operator

And our next question comes from Dan Mannes with Avondale Partners.

Daniel Mannes - Avondale Partners

Good morning everybody.

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

Good morning Dan.

Daniel Mannes - Avondale Partners

Couple of quick questions. Starting up on the... actually the up cost sides. Can you give a little color on maybe the breakdown of your domestic up cost between inflationary cost pressures versus sort of moving maintenance around more into Q1 versus other quarters?

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

I would say that there was really more than timing of maintenance that was the bigger driver and then on top of that we've seen some inflationary cost in there. But because the num the actual spending amount was greater, those inflationary costs are somewhat inflated in the quarter. So as we spend the last during the rest of the course of the year and that will not be as greater factor. But the biggest factor is we did... I would say this is probably more typical of what we would do. We would have heavier maintenance in the first quarter going into the rest of the year. So, but it certainly fuel materials, there is inflation there but we are also... we tend to have a pretty natural hedge in our revenue stream to offset that. So we've able to recover inflationary cost that are going through the planned OpEx.

Daniel Mannes - Avondale Partners

Okay and just... as I understand you said like if I am looking at... what I look in the distribution of your domestic cost for last year Q1 was the highest cost quarter last year as well. So it seems like that's fairly in line. When you are saying even more or so this year isn't last?

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

Yes, because if you go back one quarter from last year in the fourth quarter of '06 we had some pretty heavy spending there. So we moved up a little bit at the first quarter last year, in the fourth quarter of '06. So this year is even heavier from that perspective.

Anthony J. Orlando - President and Chief Executive Officer

I think the other thing that I just maybe add on to what Mark said, we did get a lot of work done and we are very pleased with the outcome of the work. So I think we are in good position for continued solid operations through the remainder of the year. So we are pleased with the work that we had done.

Daniel Mannes - Avondale Partners

And when you talk about the natural hedge, I know you have a lot of... you've lot of CPI cost escalators, especially in your service fee contracts. Can you talk about what that set by or just, certain segments clearly have cost not more than others?

Anthony J. Orlando - President and Chief Executive Officer

Well, I think there is a couple of... this is Tony. It would... we have a number of different indices that for different contracts, some are PPI, some are CPI, some are a blend of different indices. Those are the two predominant ones, CPI and PPI. But the other hedge that I think Mark was referring to is the fact that as you've seen are recycled metal revenue climb with higher metal prices. A lot of the work that we do, we're buying steel tubes and we are buying and so we are seeing price escalation in the tubes and the equipment that we buy but we are also getting the benefit of the revenue on the scrap metal that we recycle.

Daniel Mannes - Avondale Partners

Okay, great. And then briefly on your tip fee plants, you note actually a pick up in volume a little bit in the first quarter versus prior year. Can you give a little color there, because I thought most of your plants would have been running flat out? Where would you have opportunity to add volume?

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

We had a very good production quarter, and so the plants actually ran better. The tip fee plants ran better in this quarter as compared the last year. So that's, it's... we are running, practically speaking, we are running full out. But we were able to squeeze the little more out of those plants this year as compared to the last year's first quarter. But, that's on the margin because we are running the plants both being on 24/7.

Daniel Mannes - Avondale Partners

In terms, you are running them full out, but at the same time you are taking more maintenance?

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

Yes, we are. But, that's... give our guys credit in the field and they were able to manage through both the maintenance activities but we... our production levels were very strong in the first quarter.

Anthony J. Orlando - President and Chief Executive Officer

That's certainly one other things that we focus a lot of attention on is how do we bring the facilities down and conduct the needed maintenance very quickly. And as Mark said lot of credit to our operating and maintenance seems because they did a great job this quarter.

Daniel Mannes - Avondale Partners

Okay and then touching just briefly on CapEx. You noted you are maintaining the $60 million for the maintenance side. Can you give us any color on the growth side? I know this is sort of variable, but given the projects that are already sort of in the high priority. You are already working on. Can you give us any color where your gross CapEx looks like for the balance of the year?

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

Well, what we have told people is our goal; we'll be working at it. Our goal is to spend our free cash flow and reinvest in the business, and I can't tell where all those pieces are, but our goal is to take our free cash generation and reinvest. So, we didn't have a large reinvestment in the first quarter but we have a lot of things moving and hopefully we will be able to take the free cash generation from the core business and reinvested in growth.

Daniel Mannes - Avondale Partners

Okay. And then the last question. This on the historically used to give out sort of your hedge position or at least the percentage of your volume that were locked up under contracts of both waste and power. Can you give us any update especially given the renegotiate in the Hempstead contract? Where you look like for '09 and 10?

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

I think what we have said on the last call which is going to be similar, as we get to the end of this year we will largely be under contract for '09, other than a little more energy than we've had historically.

Anthony J. Orlando - President and Chief Executive Officer

Yes, and we have not run those numbers there. I will tell you that this year we are locked up above the 90% again. Our... where most of our revenue this year is under contract terms and ultimately I think some of what plays out in 2009, the two contracts that we did talk about both on waste supply as well as energy at Hempstead and in Indianapolis as we start to look out to next year. We'll have a better hand on what percentage is going to be locked up when we finalize those contracts. But in any of them it's going to be a large percentage.

Daniel Mannes - Avondale Partners

Okay, great. Thanks guys.

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

Thanks Dan.

Operator

And our next question comes from Greg Aril [ph] with Lehman Brothers.

Unidentified Analyst

Thanks a lot. Good morning.

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

Good morning, Greg.

Unidentified Analyst

I was wondering if you can provide anymore flavor on just what you think got you the win and the Chengdu opportunity and that you had sort of a creative win in the Ireland situation. What we are... what did you think you bought to the table in this case?

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

Well, it's a combination of experience and price and ability to get the job done. Those are all the factors that the community looks at when they make decisions. Again I think if we... when we first announced our joint venture with Chongqing Iron & Steel we said one of the things that we like about this joint venture is that we are manufacturing equipment locally, using the license agreement that Chongqing has with Martin, so it's technology that we are accustomed to. Yet we get the benefit of the local manufacturing and that allows us to be more competitive on pricing. And so we are pleased that we got in there and get our first win and kind of show people what we can do.

Unidentified Analyst

Got it. Also on the escalator side, just kind of switching topics, there was a question about the, what are the inflation trackers in your contracts? Is that just to confirm, did you say that's in all your contracts?

Anthony J. Orlando - President and Chief Executive Officer

It's... most of the contract. I would certainly not all of them... I think on the waste side it's probably very close to all of them. There maybe a few that have no escalation enough. On the energy side there's probably a higher percentage that are fixed price without escalation on the energy side. But even there many of them have escalation provisions or provisions that set with voided cost. There is a handful of contracts on the energy side that are regulatory based prices that are dictated by the utilities avoided cost which of course with fuel prices going up, is going up.

Unidentified Analyst

And those would be obviously your biggest position during the north-east sell?

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

Yes.

Anthony J. Orlando - President and Chief Executive Officer

And most of those contracts are fixed price locked in and there is a cover like for our Alexandria contract has a price that resets annually based on the utilities avoided cost and there maybe a few others but there is a couple of that we locked in for one year to time which we did with our Linan County facility and there are few others but, the vast majority of our revenue is moving with the CPI type escalator.

Unidentified Analyst

Thank you.

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

Thanks Greg.

Operator

[Operator Instructions]. Our next question comes from Bob Renck with R.L. Renck and Company.

Robert Renck - R.L. Renck and Co.

Good morning, just a couple of quick housing-keeping items. I think you said that the cash taxes that you are estimating say just to $25 million?

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

Yes that's correct.

Robert Renck - R.L. Renck and Co.

What at the end of the year based on upon the estimates carried out there, where will be the... what will be the level of the NOL?

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

We will use a bunch of the NOL that's on the balance sheet today. As I've said in the past, there's some other opportunities that we expect to pursue and our hope is that we would have tax shield at least through 2010 but if you look in the balance sheet today, we are using in the NOL, this year.

Robert Renck - R.L. Renck and Co.

Okay, with respect to your net debt position, I think you indicated that your net debt is $1.91 billion, as of the end of the quarter and I assume in giving to that net debt calculation, you are taking your long term debt project and other debt and your offsetting it by what cash, restricted cash and on bill receivables?

Anthony J. Orlando - President and Chief Executive Officer

What we do is we offset it with the cash, unrestricted cash and then the, if we take the component of the restricted cash that's targeted for principal repayment which is a little over 209 million.

Robert Renck - R.L. Renck and Co.

Okay, you don't do beyond bill receivables?

Anthony J. Orlando - President and Chief Executive Officer

No, no we don't do that.

Robert Renck - R.L. Renck and Co.

Okay

Anthony J. Orlando - President and Chief Executive Officer

That's an opportunity, but we don't do that.

Robert Renck - R.L. Renck and Co.

Okay, the next point is that with respect to the international operations where you've got contract wins in others, I believe that you get permitting starting... the first permitting starts I think in 2009. Do you have any ball park numbers over the next 5 years based on committed projects? What the capital costs in gross will be for the projects you've already got committed internationally?

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

Well the two projects that we basically have right now that we've identified are Dublin and Chengdu and what we said about Dublin, that's a 300 million euro approximate construction project and Chengdu will be 125 million or so in that ball park, we haven't got to the final piece of that, so and we only have 49%.

Robert Renck - R.L. Renck and Co.

Right

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

The big check right now will be the equity check that we write for Dublin.

Robert Renck - R.L. Renck and Co.

Okay

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

That's the most immediate need.

Robert Renck - R.L. Renck and Co.

And those income, do until what 2009?

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

We will probably start, thinking in investment they are later this year.

Anthony J. Orlando - President and Chief Executive Officer

Our hope is to start construction here by the end of the year; it's roughly a three year construction project, so the equity would be invested over that construction period.

Robert Renck - R.L. Renck and Co.

Okay and what's your ownership interest in Dublin? 50-50 right?

Anthony J. Orlando - President and Chief Executive Officer

We will be the majority

Robert Renck - R.L. Renck and Co.

Okay.

Anthony J. Orlando - President and Chief Executive Officer

There.

Robert Renck - R.L. Renck and Co.

So I guess the point of making is based upon new builds internationally you don't have at the moment a very big committed need for capital, based on wins you've already got?

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

But with what we have in hand... we've announced... yes, we do not have that large capital commitment at this stage.

Robert Renck - R.L. Renck and Co.

Okay next issue trying to take a longer term as opposed to quarter-to-quarter point of view. If I went back to the tier end report and I looked at your project debts between now and the end of 2012, you project debt which was something in the area of 1 billion, 1.2 billion at year end. You are going to have repayments of about 813 million which is about 63% of the project debt between now and 2012.

Which kind of leads to the point that your contract while you have a contract renewal this year in Indianapolis, I believe am I not correct in assuming that in general the municipalities are looking to lock in these new deals at least 6 to 9 months... at least 6 to 12 months before the contracts expire.

Anthony J. Orlando - President and Chief Executive Officer

I think generally speaking everybody, including us would like to do it even further and advance in that my guess is, as the way things often play out at it tends to run a little longer then you would like it has been the case in Indianapolis.

Robert Renck - R.L. Renck and Co.

Okay. On the domestic side you have been recently opportunistic doing a couple of acquisitions. In light of the current energy situation has there been any... have you seen any move towards more acceptance of Greenfield plants?

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

Again I think, a couple of things that I sighted in my script, we really intend to not to talk about specific things that we have got going on but the general mood is, in my view moving in that direction I mean the fact that elected officials in various communities in Marlin have decided to continue moving ahead with a couple of projects. We are one of the players that are compatible of getting; I think what's important about it is the fact that we have local officials deciding to continue moving ahead with ways to energy.

I cited a statement out of the New Jersey draft master energy plan. We are definitely seeing a mood swing and it is primarily driven by two things, by higher energy prices which make the cost of waste-energy more and more competitive and the concerns on climate change. We are undoubtedly going to see some type of legislation on climate change and as energy prices go up it cuts in our favor in two ways. Number one, we can charge less for the waste that we provide on our new facility and it cost more to long hall waste out from New York out to Ohio or Virginia just cost more because diesel prices are getting pretty high. So, those economic factors as-well-as the environmental factors are both moving in our favor and I think we are slowly starting to see an improved outlook from the policy makers. I think we probably fill out more headway to make with some of the local community environmental groups. And we are continuing outreach in that regard and working with different groups to explain the benefits of waste-energy and it is a long term process but I think we've got the momentum going in the right direction.

Robert Renck - R.L. Renck and Co.

I guess what I am trying to suggest and tell me if I am wrong, but has there been a mood shift even it doesn't relate... if it doesn't translate into specific contracts now for you. Among communities that they are moving from this not in my backyard and build absolute nothing anywhere near anyone. It appears that... am I correct in assuming that there is a settle shift in the market place to be more welcoming of waste-energy or energy from waste plants that it was in the last 10 or 15 years?

Anthony J. Orlando - President and Chief Executive Officer

Well clearly its going, its much more favorable viewed now than it was even 5 years ago, much less 10 years ago. So the mood is moving in the right direction but that's... they are still is a not-my-backyard concern and I think we'll probably deal with that for a long time to come.

Robert Renck - R.L. Renck and Co.

Okay.

Anthony J. Orlando - President and Chief Executive Officer

The mood is going in the right direction but I think there are still challenges.

Robert Renck - R.L. Renck and Co.

Okay and then kind of circling back to my second question where we talked about your capital commitments. Your capital commitments in the domestic side over the next five years on projects you won, do you have ... what is your cumulative estimate?

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

I wouldn't say that we have what I call good cumulative estimates it's... I wouldn't call it significant at this stages relative to the cash generation in the business.

Robert Renck - R.L. Renck and Co.

Okay.

Unidentified Company Representative

That we have announced and said obviously our goal is to protect capital to work in the business but right now we haven't announced enough to but we have a big commitment out there.

Robert Renck - R.L. Renck and Co.

Okay so I guess my point then going back to another number that you gave $1.9 billion net debt number and you have got $813 million being paid down on project debt by the end of 2012. It sounds to me... just back of the envelope that you have got a ton of capacity in terms of ability to spend.

Anthony J. Orlando - President and Chief Executive Officer

We do we have significant capacity today and its going to grow and become more flexible because we are going to pay down project debt which will have more and more unencumbered plans as we move forward which makes out capital structure more flexible.

Robert Renck - R.L. Renck and Co.

What are that say and then the final question is I guess there are still what about 35 or 40 plants not earned by the three majors in the United States. What's the and some of these are turning over can you indicate generically whether you are in or not what the appetite is for you to getting rid of these plants on the part of the local owners?

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

I think there is fewer plants in that, that are not either owned or operated by one of the three Covanta [indiscernible] or Veolia. I think it's probably closer to 20 that are owned and operated by municipality or in some cases companies that may be have one or two plants

Robert Renck - R.L. Renck and Co.

Right

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

So we want to be the leader in waste energy in all respects and where there is opportunities to grow our portfolio here in the US either through new plants or expansions or acquisitions, we are going to be focused on that.

Robert Renck - R.L. Renck and Co.

Okay, thanks very much.

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

Thanks

Operator

And that concludes today's question-and-answer session, I would like to turn the conference back over to our speakers for any additional or closing remarks.

Anthony J. Orlando - President and Chief Executive Officer

Well I think we just want to thank everybody and we look forward to speaking to you soon. Take care, have a good day.

Operator

And that concludes today's teleconference, thank you for your participation, have a good day.

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Source: Covanta Holding Corp. Q1 2008 Earnings Call Transcript
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