Covanta Holding Corporation (CVA) CEO Steve Jones on Q2 2018 Results - Earnings Call Transcript

Covanta Holding Corporation (NYSE:CVA) Q2 2018 Earnings Conference Call July 27, 2018 8:30 AM ET

Executives

Dan Mannes - Vice President, Investor Relations

Steve Jones - President and Chief Executive Officer

Brad Helgeson - Chief Financial Officer

Analysts

Tyler Brown - Raymond James

Michael Hoffman - Stifel

Noah Kaye - Oppenheimer

Jeff Silber - BMO Capital Markets

Brian Lee - Goldman Sachs

David Katter - Baird

Operator

Good morning, everyone and welcome to the Covanta Holding Corporation’s Second Quarter 2018 Financial Results Conference Call and Webcast. An archived webcast will be available 2 hours after the end of the conference call and can be accessed through the Investor Relations section of the Covanta website at www.covanta.com. The transcript will also be archived on the company’s website. At this time for opening remarks and introductions, I would like to turn the call over to Dan Mannes, Covanta’s Vice President of Investor Relations. Please go ahead.

Dan Mannes

Thank you and good morning. Welcome to Covanta’s second quarter 2018 conference call. Joining me on the call today will be Steve Jones, our President and CEO and Brad Helgeson, our CFO. We will provide an operational and business update, review our financial results and then take your questions.

During their prepared remarks, Steve and Brad will be referencing certain slides we prepared to supplement the audio portion of this call. Those slides can be accessed now or after the call on the Investor Relations section of the website, www.covanta.com. These prepared remarks should be listened to in conjunction with these slides.

Now, on to the Safe Harbor and other preliminary notes. The following discussion may contain forward-looking statements and our actual results may differ materially from those expectations. Information regarding factors that could cause such differences can be found in the company’s reports and registration statements filed with the SEC. The content of this conference call contains time-sensitive information that is only accurate as of the date of this live broadcast, July 27, 2018. We do not assume any obligation to update our forward-looking information unless required by law. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Covanta is prohibited. The information presented includes non-GAAP financial measures. Because these measures are not calculated in accordance with U.S. GAAP, they should not be considered in isolation from our financial statements, which had been presented in accordance with GAAP. For more information regarding definitions of our non-GAAP measures and how we use them as well as limitations as to their usefulness for comparative purposes, please see our press release, which was issued last night and was furnished to the SEC on Form 8-K.

With that, I would like to turn the call over to our President and CEO, Steve Jones. Steve?

Steve Jones

Thanks, Dan and good morning everyone. For those of you using the web deck, please turn to Slide 3. I will provide a brief overview of the financial results, along with an update on some of our strategic initiatives and then I will go through more color on the key drivers that impacted the quarter. The momentum we built during the first quarter continued as we generated $103 million of adjusted EBITDA and $26 million of free cash flow during the second quarter. These results reflect progress on many fronts, including record production at many of our facilities, strong waste pricing, growth in profiled waste, improvements in metal recovery and pricing and effective cost management. We are reaffirming our full year guidance and with our current view on the year, we now expect full year adjusted EBITDA to be above the midpoint of our guidance range.

Not surprisingly, a key driver of the results was the performance of the fleet. We have now completed the majority of our planned maintenance work and remain on track for our full year spending plan. Several of the largest plants are positioned to reach record waste and energy volumes and that is the credit to our operational teams and the impact of our planned investments as well as ongoing continuous improvement programs. With improved plant performance, the profiled waste sales team was able to accelerate activity, focus on customer service, internalization of waste from the material processing facilities, and diversification of flows incremental plants in the fleet led to a 9% growth year-over-year. While our key assets are performing well, we continue to move forward on the portfolio optimization plan.

We recently decided to close our 550 ton per day Energy-from-Waste plant in Warren County New Jersey. This was a difficult decision as the facility has run consistently well and the team has done a fantastic job there. However given its size and the challenging local market conditions, we didn’t see its potential to be a significant financial contributor going forward. Closure is expected in early 2019 and we do not expect it to have a material impact on the financial metrics. Some of you may have also noticed that we reached an agreement to sell our stake in a hydro plant during the quarter. We expect to receive $12 million of proceeds when we closed the sale in the near future. This activity is part of our broader plan to rationalize non-core operations. We also have a number of other smaller assets that we hope to monetize in the coming months. Looking longer term and echoing comments I have made previously, we continue to review our fleet and the profitability of all the plants to ensure that our resources are best utilized. You can view this type of activity as an ongoing effort that will result in periodic repositioning of assets and facilities as we strive to improved returns and focus our efforts.

Now, I will get into detail on the markets and operations. I will start with the waste business, please turn to Slide 4. Similar to the first quarter, waste and service revenue drove our performance with both price and volume as key same-store drivers. We realized 5% same-store volume growth, primarily due to a full quarter of operation at Fairfax and improved throughput around the fleet. We expect this trend to continue to the balance of the year. With our strong performance year-to-date, we now expect both tip fee volumes and revenues to end the year near the high end of the range. On the pricing side, we saw same-store improvement of over 3% in the quarter due to a combination of rising spot prices, contractual escalators and our success in ramping profile waste. We continue to see a robust market for waste treatment and disposal with strong volumes coming into our assets. While transportation costs are increasing, this will result in better pricing for our well-located facilities. In addition, we are beginning to see some improvement in our contractual escalators which are tied to regional CPI or other labor or materials indices. This is important as nearly $1 billion of our waste and service revenues benefit from some form of inflation escalator.

Now, let’s move on to talk about Covanta Environmental Solutions, which manages our profiled waste business. Overall, we had a very successful quarter in this group with environmental services revenues growing 14% versus all of which was organic. Profiled waste revenues into our Energy-from-Waste facilities grew by 9% and this growth ramped through the quarter and hit its highest level during June, which I believe bodes well for future quarters. We continue to see opportunities to better utilize Covanta Environmental Solutions’ material processing facilities or we call them MPF to drive more volume and better serve our customers. Further, with the startup of the Indianapolis MPF, we are now more focused on internalizing material from the MPF into our Energy-from-Waste plants, which enables us to improve our waste handling and better manage profiled waste volumes.

Last quarter, we mentioned an expanded focus on healthcare solutions, including our receipt of a permit to dispose of regulated medical waste at a third Energy-from-Waste plant in our fleet. During the second quarter, regulated medical waste revenues increased by 39%, while they still represent less than 10% of the profile waste sent to our Energy-from-Waste plants, we expect continued growth especially as we begin taking volumes into the third site later this year.

Now, let’s move on to energy, please turn to Slide 5. Similar to waste, we saw strong year-over-year improvement in energy production giving the performance of the fleet and Fairfax in particular. As we look to the full year and given the plant production outlook, we also expect both energy generation volumes and revenue to trend towards the higher end of our forecast ranges. Realized pricing was weaker year-over-year as expected primarily due to the pricing of our hedges. That said, weather has generally been favorable year-to-date, which has driven energy demand. This has resulted in 5-year lows for natural gas and storage in spite of significant natural gas production growth. This environment of modestly improved market power prices led us to slightly tighten our full year expectations for realized prices. That said, we have still not seen improvement in the forward electricity market, which remains subdued.

I am also pleased to report that we agreed to a new 15-year power purchase agreement at our Marion County Energy-from-Waste facility in Oregon. The new power sales will begin in the later part of 2019. The pricing in this agreement reflects the plant’s capability as a base load renewable energy provider and we expect it to improve the plant’s overall economic proposition. Separately, we entered into a new 1 year power purchase agreement for a portion of the output at Fairfax. This agreement includes value for the renewable aspects of the plant and the impact is reflected in the outlook for average prices in 2018. This is not the first time to put in place a short-term power agreement for Fairfax which drives value to the facility and we are hopeful we can enter into additional agreements like this in the future. These agreements represent the continuation of our efforts to reduce energy price volatility, while simultaneously achieving additional value for our renewable attributes.

Now let’s move on metals business on Slide 6. Metals represent another positive story this quarter and we continue to increase the recovery rates due to both plant output and investments in separation equipment. For ferrous same-store revenues grew 43% driven by both better prices and increased sales volumes. From a market perspective, steel tariffs have resulted in improved pricing for U.S. produced finished steel and are driving higher utilization of domestic mill capacity. The net result for us is better demand and pricing for our scrap ferrous. With average pricing through July exceeding $330 per ton on the heavy melted steel or HMS index, we are now raising our full year outlook for HMS to $275 to $325 per ton and at the same time increasing the full year revenue outlook for ferrous.

We also continue to optimize the ferrous sales mix. The presence of our centralized processing facility gives us tremendous flexibility to consolidate and upgrade ferrous material. However, with strong demand for ferrous and high transportation costs we are finding that in some cases it makes more sense to sell directly to customers from our plant and as such you make the lower – a lower percent of index price in future quarters. This will be offset by the beneficial impact of reduced costs through transportation efficiencies and will be a net positive to Covanta.

While the first site has been unambiguously bullish, the nonferrous site is more nuanced. Second quarter results were excellent as revenue more than doubled year-over-year. This was driven by our ability to get full value for the higher value fractions post separation as well as greater shipments of higher value material relative to last year. As of now nearly all of the plants in the fleet are shipping their non-ferrous materials is the central processing facility in Pennsylvania. The pricing outlook here is more muted. We have seen a recent pullback in the prices of aluminum and copper primarily due to trade tensions and concerns on global growth. The majority of our non-ferrous volumes are light products like aluminum that we sell domestically. However, certain fractions of heavier metals such as copper, brass and zinc yield better pricing in China.

Due to China’s recent change in policy, we no longer have access to these markets. We have identified other options for selling the products at modestly reduced pricing. The positive from our standpoint is that given the high quality product that we sell there is ample demand, but we really need to adjust our sales efforts in order to execute from these opportunities. The net result that we are trimming of our full year outlook for nonferrous prices and we may see some timing shifts as products may be sold in 2019 rather than 2018. As we look at metals in the aggregate, our full year range is unchanged from before, but we now expect the higher contribution from ferrous and the lower ones from nonferrous.

Let’s just move on to maintenance and operating expenses, please turn to Slide 7. Total Energy-from-Waste maintenance spend for the quarter including both expense and CapEx was $103 million versus the $110 million last year. We have now completed approximately 60% of our expected full year Energy-from-Waste spend and given our experience to-date, we would remain comfortable with the full year range of $390 million to $410 million. Outside of maintenance other plant operating expenses increased 6% year-over-year. The biggest driver of this increase was the full quarter of operations at the Dublin Energy-from-Waste facility. Managing costs effectively is an important initiative for me and those efforts certainly aided the quarterly results. As you look at the balance of the year, you should also expect a slower pace of growth in other plant operating expenses as well as in SG&A as we keep a keen focus on cost control throughout the organization.

Before I hand this over to Brad, I want to give an update on our UK development efforts. As you may recall from our first quarter discussion, the Rookery project, which received its operating permit from the UK Environment Agency earlier this year is subject to a claim challenging the agency’s permit issuance process. A brief hearing is scheduled for mid-October at which we expect the agency to vigorously defend its process and decision. We are confident that the permit will be upheld and expect the Court will issue its decision during the fourth quarter, after which we will move to financial close. We are also making progress on our development efforts at both Protos and Newhurst, the two projects that we are partnering with Biffa and both are well advanced in permitting enabling them to potentially move into construction early next year. On both projects, we are simultaneously finalizing commercial agreements, holding discussions with contractors and lining up financing. Some of our experience at Rookery is indicative of issues we may face on other projects. The reality is that each development is unique and the local dynamics differ, so predictable similarities do not exist. However, it is worth noting that permits for both Protos and Newhurst are already issued and the current process we are undertaking relates to an amendment of an existing permit rather than a request for a new permit. We believe this lessens the likelihood of a successful challenge.

With that, I will turn the call over to Brad to discuss the quarterly results in greater detail.

Brad Helgeson

Thanks, Steve and good morning, everyone. I will begin my review of our second quarter financial performance with revenue on Slide 9. Total revenue was $454 million in the quarter, up $30 million or 7% over last year. Excluding commodity prices, revenue grew $31 million organically with strong plant production driving volume growth across waste, energy and metals. Commodities were mixed bag in the year-over-year comparison with stronger metal prices contributing $3 million with lower energy prices reducing revenue by $4 million. The Dublin facility contributed $8 million of service revenue in the quarter, reflecting the fee that Covanta earns for operating the plant on behalf of the joint venture. Long-term contract transitions were an $8 million headwind in the quarter primarily resulting from the expiration of a legacy power contract in New England last year and our exiting of an operating contract earlier this year.

Moving on to Slide 10, adjusted EBITDA was $103 million in the quarter, an increase of $10 million or 11% year-over-year. Excluding commodity prices, adjusted EBITDA grew $7 million organically primarily driven by strong plant production in particular at Fairfax. So, this was partially offset in the year-over-year comparison by the $16 million of business interruption insurance proceeds received in Q2 2017. Blowing straight from the revenue line, commodities had a limited net impact as higher metals prices were offset by lower energy prices. The Dublin facility contributed $10 million of adjusted EBITDA in the quarter, which comprised both our O&M services and the proportional adjusted EBITDA from our 50% JV ownership in the project.

As you look ahead to the rest of the year, this should approximate the quarterly run-rate contribution from Dublin, but be aware that the year-over-year comparison in the fourth quarter will be against approximately $20 million of adjusted EBITDA in Q4 2017 when we still owned 100% of the project. Contract transitions represented a $6 million decline in aggregate. Looking ahead to the third quarter, I will remind you that we recognized an $8 million benefit in Q3 2017 related to the settlement of our dispute with the municipal client that we categorize as a contract transition impact in this presentation.

Turning to Slide 11, free cash flow was $26 million in the quarter. Before working capital movements, free cash flow was roughly flat year-over-year as the $10 million increase in adjusted EBITDA, included our proportional adjusted EBITDA from the Dublin project, which does not contribute to cash flow until dividends are distributed to the equity holders which we expect in the second half. Maintenance capital expenditures were lower year-over-year, which was offset by certain other items reconciling adjusted EBITDA to cash. As presented in the bridge to our full year outlook for free cash flow, we expect this category of other items to be positive over the balance of the year driven by restricted cash distributions.

Looking at our reaffirmed guidance range for free cash flow for the year, while we expect adjusted EBITDA to come in above the midpoint of our range, free cash flow will ultimately be impacted by movements in working capital. So, it’s probably not appropriate for us to be more precise within our expectation within the range at this point. Of course, our primary focus is growing cash flow sustainably over the long-term with our target to hit $250 million in annual free cash flow by the middle of next decade.

Now, please turn to Slide 12, where I will discuss our outlook for growth investments. In 2018, we plan to invest around $20 million in organic growth projects relating primarily to material processing facilities, or MPFs, in our CES business and increased metal recovery and spend approximately $15 million for new transportation equipment in preparation for commencing operations at the Manhattan Marine Transfer Station next year. These estimates were unchanged from last quarter. We continue to make progress on the permitting of our first total ash processing system and we will update our capital spend plans when that timeline is more clear. Similarly, for our UK product pipeline, we look forward to providing more color on our plan spend as those projects progress towards financial close. So keep in mind that the UK projects will be project financed with the required equity investments shared in JV partners.

Please turn to Slide 13 where I will conclude with an update on our balance sheet. At June 30, net debt was a little over $2.4 billion, down $41 million from the beginning of year. We had one financing transaction worth noting during the quarter. We issued $30 million of 20-year tax exempt corporate bonds at a coupon of 5% to fund capital expenditures in the state of Virginia. We have tapped this very attractive market in the past to fund spending in other states and we will continue to look for opportunities like this to optimize the cost, tenor and structure of our capital. At quarter end, our consolidated leverage ratio was 5.7x, which is a tick higher than Q1 as expected. Remember of course that this is over a full turn lower than where we were at this time last year. The senior credit facility covenant was 3x at quarter end, which is flat sequentially. As previously discussed, we anticipate remaining in this range on both leverage ratios through the end of the year, with our long-term plan to de-lever meaningfully further over the next several years.

With that operator, let’s open the lines for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Tyler Brown from Raymond James. Please go ahead. Your line is open.

Tyler Brown

Hey, good morning.

Steve Jones

Good morning.

Tyler Brown

Hey, nice quarter. Hey, Steve, I appreciate the comments on the potential to rationalize some assets, I think you noted a few smaller items, but maybe as you see it right now, how much in proceeds do you think that, that pipeline could potentially yield?

Steve Jones

It’s interesting we are not really doing it from a proceeds standpoint. I mentioned it’s the last couple of calls, when I first got here, I asked for kind of a ranking of our plants from a EBITDA and free cash flow standpoint and there are a handful plants at the bottom of that list that we have been put pressure on the team here to either fix them or sell them or we are going to shut them down. So, Warren County, we just talked to the employees, so we are able to talk about it on this call, but that’s the situation where the market there and it’s the case in several of these plants and there is handful at the bottom of the list. The market for tip fees and the market for power is just not good and we didn’t see it changing anytime soon. So, in a case like Warren County, we will try to sell the facility, but we have kind of put a stake in the ground at this point and said and if we don’t sell it, we are never going to shut it down. Now, interestingly challenging the same team the third rate regulated medical waste permit that we got that was another plant that was having trouble and we were able to get the third – the regulated medical waste permit that allows that, which is of great value to that plant, which has basically allowed us to kind of fix that plant. So again, it’s kind of a long answer to your question, but we are focused on trying to look at the plants that aren’t really performing or we are not getting a sufficient return on our efforts and trying to fix them and if we can’t fix them, then we will try to sell them or exit from this situation.

Tyler Brown

Okay, yes. That’s very helpful. Maybe just switching gears over to waste pricing, so same-store waste pricing was up 3% that is a nice acceleration I think from the last couple of quarters, but do I have this right that it benefited from the escalators’ higher spot pricing and profiled waste, but didn’t that number also include a drag from Fairfax coming back?

Steve Jones

Go ahead.

Brad Helgeson

Yes. So you see the impact of Fairfax from a mix perspective in the average tip fee, but the 3% growth is truly a same-store so that’s not impacted negatively by Fairfax and the mix. And you hit the drivers, within the 3%, we are in the ballpark of 2% on our contractual escalators on the tip fees and then spot pricing, I mean we are approaching double-digits now in our core markets.

Steve Jones

But you are right, Tyler – on Slide 4, you look at the contracted volume, it’s down in Q2 2018, some of that is – a lot of that’s from Fairfax. I mean, Fairfax’s tipping fees aren’t as good as some other markets out there. So, I mean you are looking at the right way.

Tyler Brown

Okay. And then maybe my last one here, if we think about though into next year, I mean CPI is getting better, I presume there is a lag to that, it feels again that the spot market is very strong, profile waste really has good footing again, why wouldn’t we see same-store pricing be better than that 3% in ‘19?

Steve Jones

We very well might see that. I keep telling the employees it’s a good time to be a waste company. Certainly, there is markets that are out there, where there is upward pressure on pricing and we are seeing it. As contracts rollover, now I realized we have 85% or so of our waste under contract – those contracts will – we are pushing pricing at this point. So, yes, I think you will see upward movement.

Brad Helgeson

And on the contractual escalators, a lot of those kick in midyear and so we will start to see that more going forward. I mean, I mean you have touched on all the drivers. It’s hard to find the headwinds right now to waste pricing. That’s the good way to put it.

Tyler Brown

Okay, perfect. Thanks guys.

Operator

Your next question comes from the line of Michael Hoffman from Stifel. Please go ahead. Your line is open.

Michael Hoffman

Hi, thank you very much. Can we talk a little bit about the thought process behind whether you close and keep or close and sell and is it a function of just the end-market pricing or is it also size?

Steve Jones

It’s a function of how much free cash flow we can generate from the facility and EBITDA to a lesser extent. So what I would do when I walked into door here, Michael, I could break the plant. I want to see who our best performers are and who aren’t our best performers? And I am putting pressure it’s hitting a crescendo at this point. I have been putting pressure on the team here, those plants that are where we are not getting, what I will call a fair return for our efforts, we neither need to get out of the plants or sell the plants or fix the plants. And I would say, there is handful of plants in this category. Some of them we will fix, some of them we have fixed and the regulated medical waste permit is a good example. And in some like Warren, I just didn’t see – we came to a decision that just – with that tipping marketing and power market and there wasn’t going to be a change anytime soon. So there is and it depends on the plants, I mean you have been closing these plants for a long time. There is different drivers on different plants and I just got to the point where it was time to make some decisions on our underperforming plants and that’s why you see certain things like the impairment write-off that we talked. I mean we are starting to make some of the harder decisions and I think they are the right decisions. If you are the shareholder it doesn’t have a big impact from a financial metric standpoint, but if you are a shareholder you would want us to look at these plants and say okay you are not getting a reasonable return for your efforts there.

Michael Hoffman

And I am curious is there – could this be better in other people’s hands because of the different corporate structural issues that could allow that to be effective and that’s why there potentially could be a sale opportunity?

Steve Jones

Yes. I mean there might be others who will look at a different cost structure or quite frankly they want to and we have had some interest in some of these plants who want to come in they – their waste permits are valuable and so they might have new technologies that they want to try out and they want access. They want a site where they don’t have to go to the permitting process. So the permits in and of themselves maybe valuable and that’s kind of what we are looking at who – we have been out there with our M&A team talking about some of these plants where it doesn’t look like we are going to – it doesn’t look like we are going to fix them is a potential buyer who has got a different view of the asset or the location or the fact that it’s got a rig connection, I mean there are certain physical attributes that maybe valuable to some other buyers.

Michael Hoffman

Got it. And then on the profiled waste there, there is sort of two approaches to this, again you maybe don’t want to get down to a plant level, which three plants got the permits or if you will to please, but what part of the country are you being able to take advantage of this?

Steve Jones

So, in the West and then in the East and that’s really how it plays out, there is – that is where the population centers are and we are looking at some other locations. So we have got good down in the West and now we are starting to look at the East Coast more so. And so later this, I mean, the regulated medical waste is a very good market, the tipping fees are orders of magnitude higher than MSW as you well know and there is a kind of a shortage of disposal for regulated medical waste in the U.S. and so we have been working with some of their folks who pickup regulated medical waste, because that’s not our thing and talking to them about where they need their coverage. And I think the East Coast needs some additional coverage is my take on it.

Michael Hoffman

Okay. And then lastly inside the profiled waste, you said less than 10% is medical waste, can you frame for us the characterization of the other 90%?

Steve Jones

Some of it’s – it’s some of the things we have talked about, some of it is folks who want to a short destruction, so think about fashion houses, purses and jeans and things that they want a sure destruction. You have some folks, who it’s drug take-back programs and that you are starting to see us in the news a lot around drug take-back programs, because with the opioid prices and this is a small part of it too by the way, but it’s going to grow is folks who want to make sure these drugs are – there is a sure destruction of the drugs. And then a good part of it quite frankly are just companies who want to advance their sustainability goals and it’s all the big guys. You can just think of any large company, most of them have a sustainability goal and one of those goals tend to be something around having lesser our waste go to a landfill and go to alternative disposal and some of it’s recycling, but that’s what drives them. That’s the biggest category though. It’s kind of all the name brand companies, for example, I saw AT&T issued a press release a few like a month or so ago where they want to take their waste from 100 of their plants and not have it go to landfills and if they are doing that, there is an opportunity for us to take that waste into an Energy-from-Waste plant. That’s the biggest part. That’s the biggest component of it though.

Michael Hoffman

And where I was going with that was have you capped out aspects like their medical waste be sounds like there is opportunities for that, that you go from 10% to something higher maybe the drugs money enclosed of TAPS, but sustainability still has room, that’s what I was trying to understand?

Steve Jones

I think they all have room. I mean, what we are going to need to balance is how much MSW we take in and quite frankly – and we get this question a lot is, they have a different impact on the plant and so we price these different types of waste depending on the work our sales team does and our engineers on what impact that might have on plant maintenance and things like that. So, it’s kind of a complicated equation, but there is upside. I mean, I think we have talked about this before, we are at roughly 900,000 to 1 million tons in that range of profiled waste and we can get up to 2 million without too much trouble and then we will start to look at how much MSW we want to back down under long-term contract.

Michael Hoffman

Last question on this being the market is flooded with volume right now between the China bands and there has got to be a lot of plastic, a lot of actually highly sort of paper, that has potentially a double-edge sword. I mean what’s the implication for you to take advantage of driving price up, but also as their performance-related issues because of PET limits, things like that. How do we see that balancing act?

Steve Jones

Yes, that’s a good question, Michael, because I don’t think a lot of people fully understand it. When I was on Jim Cramer’s show, I started to talk about just a little bit. We prefer that the recycling gets recycled. Quite frankly, it burns too hot, I didn’t get into this level of detail, but it burns too hot in an Energy-from-Waste plant, which is counterintuitive to most folks. So, but we are so far and so there is a lot of waste out there, you know this, the other large waste companies reported this week, good time to be a waste company, there is lot of waste out there. We are not seeing bells of plastic or bells of paper come into our facilities and quite frankly, if they come there, we say go do what consumers wanted to do, which is recycle that material, but we are starting to see kind of paper and plastic get lost in the MSW. And so we have actually added some more eyes to our tipping floor, so put people on the tipping floor to make sure we are not getting kind of plastic sliding into the MSW. And so I’d say there is again handful of plants where we are starting to see the BTU content creep up a little bit. And so there is something going on there, but it’s not large scale at this point and again we are not seeing bells of plastic or bells of paper show up at our plants.

Michael Hoffman

Alright. I should, one last question there is a new county executive being elected or should be elected when the primary and so to the fact that in Montgomery County Maryland and he is running on a platform of I am going to close that incinerator would you be handicap that?

Steve Jones

I don’t know what they are also going to do with the waste. They have a beautiful system there, right. So and they have spent a lot of money on it, it’s probably the most advanced system outcome in the contract where you probably had the same reaction. So I don’t know if I can handicap it as much as they have spent a lot of money on that system. I think there is going to be some folks on the other side of the equation. We are saying, okay what else are we going to do with our waste or we going to start to bury in a hole in the ground. And so I think more to come there, but we have been watching this situation there. And that’s by the way that’s the plant that we just operate. And if they go in different direction, they go in different direction. So it won’t have a material impact for us.

Michael Hoffman

Okay. Thank you.

Operator

Your next question comes from the line of Noah Kaye from Oppenheimer. Please go ahead. Your line is open.

Noah Kaye

Good morning and first Steve thanks for the update on the UK pipeline, good to see you said that date and hopefully the timeline firming up a little bit more there. Wondering if you could give us an update on the timing for your beneficial ash processing just – that is when you think you can open up that facility?

Steve Jones

Yes. So the taps work continues, Pennsylvania, so the first system will be in Pennsylvania. We have got the site for it and we are – and then the other side of it is Pennsylvania need to issue an umbrella permit because this is the first of its kind and they give that now and then we had been issue our specific permit for this site which again is to be Fairless. So it’s in Fairless Hills along with where our recovered metals recovery systems are. So we have got some cost synergies there and things like that. But we now have issued our specific permit for that site and we got to give them a way out of what we are going to put in there. That’s in the process now. We suspect that will get wrapped up probably early fall here in that timeframe. And then at the same time our technology providers actually building some of the units that were module rising something and we were – one of the team was down there last week looking at some of the equipment that’s already been dealt. And so we expect we will start kind of construction in earnest in kind of in the fall timeframe. And then we are looking at early next year or first quarter kind of timeframe to start the facilities up.

Noah Kaye

Right. Was that called out in the growth capital schedule?

Steve Jones

No, because we don’t have that. We don’t have the exact time. We don’t have that permit yet. Once we get the permit, we will firm all this up and then we will also give you kind of what we have told already, I mean the capital is in the $25 million range. And then we will give you some idea on what we think the financials are.

Noah Kaye

Okay, great. And one more from the – I think more folks are starting to look at 2019, we heard that for the waste companies, obviously not looking for guidance, but I do note that there are some one-time items this year that may not repeat next year and I just wanted make sure we have a full view to that at least half the way through the year here, you are getting about I think $10 million of insurance recoveries on Fairfax, you are not going to have say $3 million to $4 million of EBITDA from Dublin, anything else as you kind of looked at what’s been done so far in the balance of the year stuff that that you might call out as non-recurring?

Brad Helgeson

Yes. Noah, it’s Brad. And I mean I will start with the caveat that you have already noted. I mean it is really for us to be talking 2019. But in terms of the big movers you mentioned Dublin of course benefiting us in 2019 will be the startup of the operations at the Manhattan MTS’ and the New York City contract. Round numbers those will probably wash I mean I think for modeling purposes at this point. The big driver as we have been talked about the big driver next year is going to be organic growth and that 3% to 5% annual growth target we think that’s the right expectation for people to have. And by the way that 3% to 5% would be inclusive of or net off the $10 million or so business interruption insurance that we expect this year. So 3 to 5 truly incremental. And then the big variable you are left with is commodity prices. On the metals side those prices obviously tend to be volatile. Though there is pretty good reason to feel bullish about metals prices as we move forward. And then on energy prices I would note that the curve is slightly backward dated, so you probably see energy prices take a step lower for us next year. Again that’s just based on what the forward curve looks like today. We will see how it plays out. And then the other item impacting the energy line is capacity. So we are generating about $50 million of capacity revenue this year, based on the results of the capacity auctions in New England and PJM East which now are 2 years ago now. We are probably looking at $5 million to $10 million decline on the capacity revenue line next year and that’s one that people may not have been focused on up till now. That’s really yes. I think our focus is on all the things that we are doing to drive that 3% to 5% as high as we can.

Noah Kaye

Okay. And is there – just to clarify when you are talking about this is really helpful, but I thought that you said the 3% to 5% you are thinking about inclusive of even this $10 million row back, so the number for this year is the baseline number for next year, is that what you mean or is it going to characterize that? Okay.

Steve Jones

Yes, that’s exactly, that’s correct, yes.

Noah Kaye

Perfect. Thank you so much.

Operator

Your next question comes from the line of Jeff Silber from BMO Capital Markets. Please go ahead.

Jeff Silber

Thanks so much. Just a couple of quick follow-up questions, one is on the Warren plant, is that a positive contributor to free cash flow right now or has it been?

Steve Jones

It’s kind of going in and out of positive over the last several years, you are not going to notice that it’s closed down from a free cash flow standpoint, let me put it that way.

Jeff Silber

Okay, that’s fair. Are there any closure related costs that might be one-time in nature?

Steve Jones

Yes. We have done – I have been through this before in the previous slides, we have done the analysis of keep versus shutdown and there are some costs. I mean we have rolled that all into the analysis when we looked at whether it was better to shut it down and potentially sell it, again we were talking about that a little earlier. But there are some costs, we have had some kind of lingering obligations that take in waste, but I think there is – so we are going to be taking in some waste and putting it into the landfill that’s right down the street. I mean that’s part of the problem there. There is a landfill right down the – breakdown the way there. So there are some lingering costs, but when you do the analysis it was better to – their shutdown case was better financially than the keep running case.

Jeff Silber

Got in. And then just switching gears over to the metals side of the business, you mentioned the impact or potential impact of the shift to ferrous from nonferrous on sales – on revenues, excuse me, is there a meaningful impact when you see that shift on EBITDA?

Steve Jones

This is the heavy metal this is – so the impact is so far again ferrous is better, nonferrous is the bigger pieces are heavier pieces of nonferrous that are going to China. China has kind of shut their doors for the time being. We will end up selling that material in Europe and it will cost us from an EBITDA standpoint it will be a few million dollars, but it’s not a big impact. It’s – quite frankly we are looking at okay when do we – when do we want to sell this material, is China going to open up. And there is actually – part of it I won’t get too detailed here, but part of it trying to get value for the zinc that’s in this metal and there is some self-help where we can take the zinc out ourselves and sell it separately. So there is – we will sort this one way or the other, but over the remainder of this year, it’s probably a few million dollars or so from an input-output standpoint, it’s not a big deal. That’s why you heard me say when you kind of put everything in the hopper and look at we are kind of – we are the same range. Ferrous is a little better, nonferrous is a little worst.

Jeff Silber

Got it. And again this is all incorporated in the updated guidance…?

Steve Jones

That’s correct. Yes. That’s correct.

Jeff Silber

Just wanted to double check on that. Alright. Thank you so much.

Operator

Your next question comes from the line of Brian Lee from Goldman Sachs. Please go ahead.

Brian Lee

Hey guys. Thanks for taking the questions.

Steve Jones

Hi Brian.

Brian Lee

Hey, good morning. Quick follow-up on the previous one just I appreciate the EBITDA color on the nonferrous impact, can you actually quantify the – from a tonnage perspective, I may have missed it, but what China represents as a percent of the kind of 28 to 33 so tons guidance for the share?

Steve Jones

20% of our nonferrous volumes had historically been shipped to China.

Brian Lee

Okay, great. And then just from again I know you are too early to really talk about 2019, but if you think about that part of the business and try to set some early expectations for ferrous versus nonferrous mix, I mean that’s something that year are navigating here through the back half of the year, but is that something you think will be a structural shift we need to be maybe factoring into our views for next year and going forward or is this a view that it is more of a temporary dynamic and ultimately you do normalize back in China?

Brad Helgeson

Well I think – hi Brian, it’s Brad. I mean that’s very difficult to predict given the political and trade undercurrents here between the U.S. and China. I think what we have been focused on is as Steve touched on removing the zinc from the material in order to sell that separately and generate value there. I think what we are really focused on and we are at a great point here as we sit here in 2018 and look forward to where with the centralized processing – I am talking about the nonferrous business with the centralized processing facility in Fairless Hills we have the ability to react to whatever happens with China or any of the other end markets. We can sell domestically. We can send it East. We can send it West. And so what will happen in the market, I think we are in a position to react appropriately and so long story short impossible to answer the question you are asking. But I think there is some give and takes with of all this. So with these political undercurrents, we are having the pivot where we sell the – as Steve said it’s the heavy fraction of our nonferrous, most of the nonferrous aluminum that we sell domestically. But then going the other way is we are seeing much stronger U.S. steel production, no utilization and that flows through into ferrous scrap pricing and so our outlook for ferrous has gone up. How that plays out, your guess is good as ours.

Steve Jones

I mean the nice thing is that versus 2015 when there was a lot of turmoil on the metals markets, we have got more – we have got more self-help now what we can pivot in a lot of different directions and so that’s the thing that’s changes kind of during the last several years as we have got more optionality associated with the metal that we – is the product that we are selling the quality is better and then where we sell it.

Brian Lee

Okay, that’s great. It all makes sense. Second question and then I will pass it on is on the energy business you mentioned the 15 year Marion County PPA, any sense of pricing that you can provide in terms of where that got struck versus maybe if we average or contracted average. And then you specifically called out the renewable attributes, could you elaborate on what that means, are you getting – are you selling recs along with the power and then maybe just lastly on that line of questioning, any other sort of PPA activity or interest that you are seeing in other areas of the fleet right now? Thank you.

Steve Jones

Yes. So Marion, basically the new contract, the pricing is closer to our fleet wide average, right, because the previous pricing and it’s not a big plant, but the previous pricing was pretty low. So we were able to enter into a PPA that’s closer to our average pricing. And I don’t get into actual pricing. There are some sensitivities around that. We were pleased with Marion and we – and I have mentioned it before, we are looking at other facilities to see where you have local folks who are interested in the green attributes or the environmental attributes of their Energy-from-Waste plant. So effectively buying green power and so we have a lot of activities underway where we are looking at direct selling to companies or it’s not usually utilities, but it’s companies who I think it’s really somewhat novel to be able to take their waste into an Energy-from-Waste plant and get the power back, right. So it’s kind of a round trip. So we will look at those types of situations. We are also looking a lot of situations where we can get more from the steam that we produce. So there has been a number of activities underway and I have mentioned them a few times where we are looking in and around our plant and that whole effort – we have a whole effort underway, where we are looking in and around our plant to sell steam rather than electrons, because steam is more valuable than electrons these days. And so that’s the kind of work we are doing. We wanted to highlight Marion, because it is – I don’t think anybody is signing the long-term PPA agreement in many, many years in the U.S. So we thought that was interesting and also it’s a fact that it does help pricing overall. It’s a healthy economic proposition of that, that Energy-from-Waste plant.

Brad Helgeson

And Brian, I will put a slightly finer point on Steve’s comment, it’s about that the pricing being consistent with fleet average. I think the way to think about it is it’s generally consistent with our fleet average for our contracted sales, not the overall.

Steve Jones

Yes, good point.

Brad Helgeson

Yes. And as Steve also mentioned previously we have been selling their at-market prices in a market that’s probably under pressure relative to what our averages for the open position across the fleet.

Brian Lee

Alright. Thanks for the color guys.

Operator

Your next question comes from the line of David Katter from Baird. Please go ahead.

David Katter

Good morning, guys. Thank you for taking the questions. I just wanted to ask about the 3% to 5% growth that you guys referenced and I am sorry if I missed it, but can you talk about some of the capacity headwinds that may happen next year and then the 3% plus same-store pricing is factored into that. So if you could what’s the breakdown of that growth between pricing and maybe volumes or other initiatives?

Brad Helgeson

Sure. Hey, David, it’s Brad. So just to clarify, our 3% to 5% organic growth target is exclusive of commodity price changes and the change in capacity rates. We would categorize a commodity price change. So you think about it in two categories in this case where 3% to 5% would be growth in waste pricing. To the extent that we have additional capacity for greater plant production through things like continuous improvement, metals recovery, so think of it volume generally and then the capacity as I mentioned a few minutes ago as we sit here today, it looks like we have a headwind of between $5 million and $10 million next year on the capacity line, which again is separate from the 3% to 5%.

David Katter

Got it. That’s helpful. Thank you. And last one for me, can you remind us on the kind of construction timeline for some of the projects in your pipeline. So, I know if they all get under construction by 2020, how long did it take from construction to kind of seeing the benefits flow through the P&L?

Brad Helgeson

Constructing on Energy-from-Waste plant is generally about 3 years. So we are expecting to have 4 in construction by that 2020 timeframe.

David Katter

Got it. Thank you, guys.

Operator

Your final question comes from the line of Tyler Brown from Raymond James. Please go ahead.

Steve Jones

We lost you a little bit there, Tyler.

Tyler Brown

You there?

Steve Jones

Yes.

Tyler Brown

Hey, sorry. Hey, Brad, were the hydro assets, were they consolidated or were they in equity income?

Brad Helgeson

Equity income.

Tyler Brown

Equity income, okay. And then again I hate to kind of being on this capacity thing, but I thought I read earlier this quarter that the your PJM capacity auctions were actually pretty strong on the closure of some nukes and coal capacity, I get the $5 million to $10 million in ‘19 but won’t that rise in ‘20 or ‘21?

Brad Helgeson

Yes good point.

Tyler Brown

Will it rise over 50?

Brad Helgeson

The recent capacity auctions were improved right, so that’s coupled with 2, 3 years out now come back around. You had another question I’m sorry I interrupted you.

Tyler Brown

No, no sorry, will arise back over 50 or is it just hard to say?

Brad Helgeson

Yes. I mean, it’s probably premature for us to give that specific guidance on it, but certainly, as you point out the auction results more recently have been more positive than what we will realize from a couple of years back next year.

Tyler Brown

Okay. And then just lastly is – I may have this strong, but is it Marion County is that an EBITDA contributor under the new PPA meaning is it a incremental EBITDA positive?

Brad Helgeson

Yes it is. Yes, it has improved the economic proposition. I think in my prepared words, I said we have improved the economic proposition of the Marion County facility. So that’s what we are looking at. I mean, we are going to be producing the power. Power is coming out of these plants or steam it’s how do we get more value for that. And so this is a good example of us look at a facility going, we can get more power in our electric, our power group going how can we get more value for that figuring out a quick clever way to get a long-term increase in our power pricing.

Steve Jones

And Tyler, just one detail on that VA, we wouldn’t see any benefit from that immediately, that’s really going to be more of a 2020 and beyond story.

Tyler Brown

Okay, that’s very, very helpful as well. Well, anyway I appreciate the time and again nice quarter. Thanks.

Steve Jones

Thank you.

Operator

And there are no further questions at this time. I will now turn the call back over to Steve Jones for closing remarks.

Steve Jones

Thank you. Thanks everyone for participating in our call today. I want to take a moment to reiterate some of my earlier comments as we sit here today at the halfway point of the year. Things are moving along very nicely. We are excited about the progress on our organic growth initiatives and we are focused on moving our UK development into construction. I would like to thank his team for their efforts which are paying off and we are committed to continuing this performance as we move through the balance of the year. So thanks again for joining us today and have a good weekend. Thanks.

Operator

This concludes today’s conference call. You may now disconnect.