Covanta Holding Corporation's (CVA) CEO Steve Jones on Q4 2018 Results - Earnings Call Transcript

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About: Covanta Holding Corporation (CVA)
by: SA Transcripts
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Earning Call Audio

Covanta Holding Corporation (NYSE:CVA) Q4 2018 Results Earnings Conference Call February 15, 2019 8:30 AM ET

Company Participants

Dan Mannes - VP, IR

Steve Jones - President and CEO

Brad Helgeson - CFO

Conference Call Participants

Tyler Brown - Raymond James

Brian Lee - Goldman Sachs

Michael Hoffman - Stifel

Jeff Silber - BMO Capital Markets

Ben Kallo - Baird

Moses Sutton - Barclays

Operator

Good morning everyone, and welcome to Covanta Holding Corporation's Fourth Quarter and Full-Year 2018 Financial Results Conference Call and Webcast. An archived webcast will be available two 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. A transcript will also be archived on the company's website.

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

Dan Mannes

Thank you, Emily and good morning everyone. Welcome to Covanta's fourth quarter and full year 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 comments, Steve and Brad will be referencing certain slides that we prepared to supplement the audio portion of this call. Those slides can be accessed now or after the call on the Investor Relations section of our website, 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 discussions 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, February 15, 2019. We do not assume any obligation to update our forward-looking information unless required by law. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Covanta is prohibited.

The information presented includes non-GAAP financial measures. Because these measures are not calculated in accordance with U.S. GAAP, they should not be considered in isolation from our financial statements, which have been prepared in accordance with GAAP. For more information regarding definitions of our non-GAAP measures and how we use them, as well 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 From-8K.

With that, I'd like now 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. We finished strong in 2018 generating $457 million of adjusted EBITDA and $100 million of free cash flow for the year. This performance, which came in at the top end of the guidance ranges is a product of our team's hard work and dedication and I want to take a minute to thank them for this great performance.

For 2019 we expect adjusted EBITDA in the range of $440 million to $465 million and free cash flow of $120 million to $145 million. As we discussed on the Q3 call, our outlook for adjusted EBITDA is roughly flat to 2018. However, as Brad will discuss in more detail, the midpoint of the guidance range for adjusted EBITDA actually reflects a nice underlying trend of growth when normalizing for the timing of the business interruption proceeds that we received in 2018. And of course the free cash flow range represents significant year-over-year improvement.

I'll now review some key business and strategic highlights, please turn to Slide 4. From a performance perspective what a year. We set records seemingly across the board. We process more waste, generated more energy and recovered more metals than we have in any other year in the history of the company. We processed a record 20.4 million tons reflecting a full year of doubled operations, the addition of two large Palm Beach plants towards the end of the year, and processing records at six different facilities which is a credit to our operating teams and demonstrates how the continuous improvement initiatives are bearing fruit. We expect that you'll see more of the same in 2019 with even higher throughput given the full year contribution from Palm Beach.

We believe that safety performance and operational performance go hand in hand and while the plant set production records in 2018 we also had the safest year in the history of the company. Energy from waste plants saw 31% reduction in incidents year-over-year. Our total case incident rate which is the measure of the number of incidents to total hours worked was at the lowest level in the company's history. This is a fantastic accomplishment. Safety is about what we do every day and we'll continue to strive for zero incidents in the future.

Our primary end market is sustainable waste disposal and as I've become known to say, it's a good time to be a waste company. Disposal options in many of the markets are decreasing and transportation costs are rising which is a big dent for our plants which are more proximate to population centers. This manifests itself in improved pricing and we're getting our fair share with same-store tip fee prices up 3.5% in 2018. Remember that this is occurring even as the majority of our waste is under contract with price escalators running closer to 2% to 2.5%. We expect similar pricing performance in 2019 and believe that there are substantial run ways to continue to push pricing.

From a client perspective, during 2018 we extended three service fee contracts totaling 1.1 million tons for an average duration of five years. In 2019 we have expiring service contracts at two plants that we own and we're currently in active negotiations with those client communities and look forward to reaching positive outcomes for both contracts. Beyond that, we don’t have another service contract expiration until 2023. So this segment of our portfolio is well locked up.

Our Covanta Environmental Solutions business or CES continues to grow nicely. Revenue from profits in higher value profile waste and the energy from waste plant grew another 10% in 2018. This growth was the product of our prudent diversification of outlets for profile waste across the fleet, fair internalization to our material processing facilities and a 26% growth in regulated medical waste. While this waste stream still represents less than 10% of our total internalized profile waste, it is growing quickly and offers dramatically higher margins.

We expect our third permitted regulated medical waste plant to ramp up in 2019 and we plan to continue to expand our capacity to handle these waste streams by adding permits at other plants in the coming years. At the mature processing facilities we grew other environmental service revenue by 8% in 2018 and we look to further leverage these assets for mid single digit revenue growth in 2019.

Lastly, we look forward to the start up of the New York City marine transfer station in Manhattan in the second quarter. We're proud to continue to partner with New York City to provide a sustainable long term waste solution and once the facility is fully operational, we expect to receive an additional 170,000 tons annually into the system for ultimate processing at our Delaware Valley and Niagara sites. In total, our energy from waste plants will now manage roughly one third of all waste collected by the city for disposal.

As you would expect, record waste throughput and limited plants downtime translated into record energy production in 2018. With modest improvements in market energy prices we had a better than expected year for energy revenue. That said, even with this recent cold snap energy prices remained subdued and our primary goal is to manage risk and volatility. We entered 2019 well hedged and have rated slightly better than the hedges realized in 2018. For the year, nearly 85% of the forecasted energy revenue is already contracted or hedged. From a long term contract perspective, we have excellent visibility with no material contract maturities until 2024.

As we noted in prior quarters, capacity payments will be lower in 2019 based on the auction results from three years ago. Our outlook is for similar levels of realized capacity prices for the next two to three years. And also we continue to explore opportunities to improve pricing from our energy either from its green attributes or premium locations and expect to have more to highlight in future quarters in this area.

We continue to advance our capabilities and performance in metals recovery and processing in 2018 setting yet another record for recovered volumes. Adjusted for client revenue sharing, we recovered over 470,000 tons of metal representing a 9% increase over 2017. We continue to find new opportunities to increase metal recovery, particularly on the nonferrous side through selective additions of equipment at facilities.

Prices for the ferrous and nonferrous material have been impacted by different market forces dictating how we have reacted to minimize volatility and maximize value. Tariffs have been media stories as the tariffs on imported steel have supported domestic steel production and thus demand for our products [indiscernible]. The HMS Index averaged over $300 per ton for the year in 2018 and while prices are likely to soften a bit in 2019, we expect relative stability in ForEx prices to continue resulting in a favorable overall environment for this business.

Nonferrous has been a bit more complex as demand for scrap aluminum has declined and prices softened due to policy changes in China. However, the team has successfully found ways to add value to our products via improved separation and historic persistently low scrap prices for scrap aluminum we expect realized nonferrous prices and total revenues to be higher in 2019. We are often asked, how much exposure we will really have to market prices for metals. So I'd like to provide some context.

On ferrous, the current HMS of nearly $300 per ton is approximately at the 10-year average. While this isn’t an exact science, we estimate that a $25 per ton move in HMS on an annual basis would have a $4 million to $5 million impact to revenue implying that movements to the historical highs or lows represent approximately $15 million to $20 million of upside or downside.

On nonferrous, we saw a number of products, but most correlate either to aluminum [audio gap] are already at 10-year lows and appear to have bottomed. So we see more potential for upside than downside from current levels. Copper prices are slightly below the 10-year average and at $0.25 per pound move in copper prices would likely impact revenue by around $2 million to $3 million annually positively or negatively.

One of the benefits of our metals program is that we diversified our exposure across multiple metals and geographic end markets while we increased our product quality and volume. These efforts make metal a more doable and value line of business for us going forward. Earlier this year we began constructing our first Total Ash Processing System or TAPS as we refer to it. Construction is likely to take most of the first half of the year and we'll commission it in the second half. We do not expect a material financial contribution in 2019. However, we are very excited about this potential to increase metal recovery and reduce our ash hauling and disposal cost and hope that this is the first of several such facilities.

While we work through construction and commissioning the first location, we're working in parallel to develop other sites in the fleet that could make sense for additional systems once the first facility is in operations. On the top of the plant maintenance, our total energy from waste maintenance spend was up less than 2% in 2018 as compared to the prior year. Even as we are in the Dublin and Palm Beach plants, the outlook for 2019 is similar adjusted for inflation and our full year impact on the large Palm Beach facilities. This level of maintenance spend is in line with the previously discussed plans and the overall long-term trajectory is unchanged.

All else equal, we expect total EfW maintenance spend to continue to increase at an inflation type rate over time plus or minus. As we discussed our current level of maintenance activity is appropriate to cover both, routine maintenance and long-term asset reinvestment as we see to ensure that our plants will continue to run at peak performance for decades to come.

One facet of managing costs and risks is managing the size and composition of our fleet. You've been hearing from me for some time that I want to take action on the lower profit facilities and in 2018 those efforts began to yield tangible changes. We successfully amended our agreement with the City of Long Beach and this new arrangement represents a model for how we'd like to structure the client facility agreements with appropriate risk allocation, long term reinvestment by the client, and shared upside for new revenue opportunities.

In Palm Beach, Florida we've gotten off to a great start with a new client. These large facilities fit perfectly into our existing footprint, are operating well and offer attractive opportunities for improvement going forward. During the second of 2019 we planned to [indiscernible] Warren County, New Jersey facility. We've already announced this decision, so there's no change there. Shutting down operations at a facility is a difficult decision, but in this case it is the right decision from a risk reward standpoint.

Lastly, during 2018 we signed to close on the sale of the hydro operations and three transfer stations, as we look to redeploy capital invested in noncore assets for higher returns elsewhere. Note that while our transfer stations represent a critical component of our overall waste sourcing operations, these facilities were no longer strategic for our assets and represent greater value in the hands of other waste companies.

To be clear, we're not done yet. There are many ways to improve the economics of the assets and we're pursuing multiple paths at other facilities that need improvement. Expect to hear more from us on this topic as we move to 2019.

Finally, I'd like to discuss the progress we've made on our UK pipeline. In late December we announced that we reached financial close of the Earls Gate Energy Center. Located in Grangemouth, Scotland, Earls Gate will have the capacity to process approximately 215,000 metric tons of waste per year and generate 21.5 megawatts equivalent of power. I say megawatts equivalent because this plant will serve both power and steam. The majority of the facility's waste is contracted with municipalities and local haulers, while the energy output is secured under long term agreements. We expect the facility to be in service by late 2021 and we're extremely excited to have our first UK project investment moving forward.

Regarding the Rookery project in Bedfordshire, England, the high court denied a court challenge to the issuance of our operating permit in November. The local opposition group is now appealing this decision and we expect this to play out over the course of 2019. We agree with the environmental agency's position that the challenge to the very thorough process is without merit and we received strong legal advice supporting this. In any event, we view this as an issue of process only, not whether the plant will have the rights to operate. Therefore we're pursuing options to proceed to financial close and commence construction of the much needed infrastructure prior to the end of the appeals process.

Our two projects in the partnership with Biffa, Protos and Newhurst continue to make progress as well. We just received the operating permit for Protos and expect to move towards financial close once it has cleared the standard 90-day judicial review period. The Newhurst project awaits a draft permit following an application to bury the existing permit, which will then be subject to consultation. In both cases we will also be in position to reach financial close in 2019.

I say in comments I've made in the past, I expect to move all three of these additional advanced projects into construction by the end of 2019 and running operations along with Earls Gate we expect our UK investments in total to generate $40 million to $50 million in cash annually. The excitement in the investor community around the execution of our long term strategic plan for the UK project is well-founded. We look forward to keeping you updated as our pipeline progresses. We consider continued international development to be critical to our long-term growth plan.

With that, I'll hand the call over to Brad to discuss the financial results and outlook in greater detail.

Brad Helgeson

Thanks, Steve. Good morning everyone. I'll begin now with a review of our financial performance with revenue on Slide 6. Total revenue was $1.87 billion for the year, up $116 million or 6.6% compared to 2017. Organic growth, excluding the impact of commodities accounted for the majority of the improvement. Record EfW plant production including full year of operations at Fairfax and an environment of stronger waste prices with same-store tip fee price growth of 3.5% drove the increase.

Commodity prices had a modestly positive net impact as we saw a $9 million benefit from metals with strong ferrous index prices outweighing softness in nonferrous partially offset by a $4 million impact from lower energy prices with slightly lower prices on hedges and under contracts with caps and floors as compared to 2017. Over the course of the year Dublin generated $10 million of incremental service revenue net of its contribution in Q4 2017, while the newly acquired Palm Beach operations added $17 million for the year.

Long term contract transitions represented a net revenue reduction as the previously discussed transition of a client facility to another operator earlier this year and the expiration of a legacy power contract contributed to a $21 million headwind.

Moving on to Slide 7, adjusted EBITDA was $457 million in 2018 exceeding our guidance range and representing an increase of $49 million year-over-year. Excluding commodity prices, adjusted EBITDA grew by $44 million organically, again driven by strong plant production particularly at Fairfax and the inclusion of $17 million in business and eruption insurance proceeds during 2018 relating to the fire in 2017. Excluding the benefit of the business and eruption insurance in 2018 we grew adjusted EBITDA by over 6% organically before commodities surpassing our 3% to 5% annual organic growth target.

The net benefit from ferrous metal prices and whilst headwind from energy prices as I just discussed, trampolated [ph] directly from revenue to the adjusted EBITDA line. The Dublin facility contributed $22 million of incremental adjusted EBITDA in the year which comprised both our O&M services and the proportion of adjusted EBITDA from our 50% JV ownership in the projects company. Contract transitions represented a $22 million headwind on a year-over-year basis half of which related to the client settlement benefit that we received in 2017 with most of the balance relating to the expiration of a legacy power contract and lower contractual client project debt service payments.

Turning to Slide 8, free cash flow was $100 million for the year at the top end of our guidance range compared to $132 million in 2017. The primary driver of the change was working capital which represented a net $56 million headwind on a year-over-year basis with a $12 million cash outflow in 2018 compared to a $44 million cash flow benefit in the prior year.

As discussed when we set guidance going into the year, we initially plan for a $20 million to $40 million net use of cash in working capital in 2018 but this anticipated our outflow was mitigated by very strong accounts receivable collection performance driving a five-day reduction in days sales outstanding.

Stepping back from the working capital noise, underlying free cash flow grew by $24 million or over 25% year-over-year, that's sort of the story here. This was driven by strong organic growth in adjusted EBITDA as well as the first cash distribution received from the Dublin project partially offset by higher maintenance CapEx year-over-year.

Now please turn to Slide 9 where I'll review our growth investment activity. During 2018 we invested $23 million in organic growth projects primarily through increased metal recovery and opportunities in our Covanta Environmental Solutions business, including expanding further into regulated medical waste. We expect to spend a similar amount in 2019 and believe that this represents an appropriate expectation for recurring spend in these areas for the next few years before taking into account larger discrete projects. These investments tend to be small individually, but have very attractive returns and quick paybacks.

For larger projects, the first to come on line will be the New York City Marine Transfer Station or MGS in Manhattan. We expect to spend about $30 million on the project in total primarily for additional transportation equipment needed to add service at this second MTS. $13 million was already spent in 2018 with the balance to come during the first half of 2019.

As you heard from Steve earlier, we received a permit for our first TAPS site and have commenced investment to purchase equipment and build out the system. We expect to spend around $15 million in 2019 and approximately $25 million in total through 2020. We invested $21 million into our UK development pipeline in 2018, including early site work at Rookery and the initial equity contributions and our entry premium for Earls Gate. The 2019 outlook shown here for UK spend of $10 million represents just the remaining investment into Earls Gate and does not yet include commencement of full construction on Rookery, Protos or Newhurst. Once we reach financial close on these projects, we intend to update this forecast.

Overall, we expect the four projects to require a total equity contribution of $150 million to $200 million. Note that the funding for Earls Gate is front loaded, but the investment profile for the other projects will likely differ. We expect Protos and Newhurst to be generally ratable over the life of construction while Rookery will likely be backend weighted. We'll provide more of these details as projects reach financial close. Acquisition activity totalled $50 million during 2018 primarily reflecting the acquisition of the Palm Beach operations.

As usual, we won’t be providing a specific outlook for this line in 2019 and instead will update it only as specific transactions take place. However, you can expect that acquisition activity would be relatively limited in 2019 given our other investment priorities. Please note that we're also highlighting assets sale proceeds here as they will provide incremental funding for our capital spend. During 2018, we monetized nearly $200 million most significantly from the sale of a 50% stake in the Dublin project.

Looking to 2019, while we had not exclusively listed any asset sales we do expect to include any premiums paid to us by GIG when we reach financial close on Rookery, Protos and Newhurst. These proceeds will help fund a portion of the $150 million to $200 million of UK project equity spend.

Please turn to Slide 10, where I'll provide an update on our balance sheet. At December 31, net debt was a little over $2.4 billion down $31 million from December 2017. Our treasury team had a busy year completing three important refinancing transactions totaling approximately $2 billion which combined to extend our maturity profile, reduce interest cost, and improve our liquidity and flexibility going forward. We'll continue to look proactively for opportunities like these to optimize our capital structure.

At year end, our consolidated leverage ratio was 5.6 times down from 6.4 times at the end of 2017. The senior credit facility covenant ratio entered the year at 2.2 times which is almost a turn and a half lower than the 3.6 times we had at the end of 2017. At year end, our available liquidity under our revolver was nearly $450 million. Considering our planned investments in 2019 and the expectation for adjusted EBITDA to be roughly flat year-over-year, we expect our 2019 leverage ratios to remain similar to current levels.

Remember that we've reduced consolidated leverage by 1.5 turns from its peak in 2017 and as we continue to drive adjusted EBITDA and free cash flow growth these metrics will improve further over time towards our long term goal of four times. However, in the near term we believe that the best path for maximizing long term value for shareholders is to execute on our attractive investment opportunities while our joint venture with GIG minimizes the near-term impact on our balance sheet.

Now please turn to Slide 11, where I'll talk about our 2019 outlook for adjusted EBITDA in a little more detail. We're initiating 2019 guidance for adjusted EBITDA of $440 million to $465 million. As previewed on our third quarter call, this outlook is similar to 2018 results. Organic growth excluding commodities is expected to contribute $10 million to $20 million for the year, again driven by strong EfW facility production, increased metal recovery, and improvement in waste prices. Note that this growth is net of the year-over-year headwind from Fairfax business interruption insurance proceeds received in 2018, which I’ll discuss in further detail shortly.

At the midpoint of this net organic growth range we should be towards the lower end of our annual target of 3% to 5%. However, excluding Fairfax insurance from the year-over-year comparison we’d expect to come in at the top or even above the range again this year. Commodity pricing is expected to weigh on growth this year. As previously discussed we expect capacity payments to be lower by about $10 million year-over-year with variability up or down from that number based on market power prices for our open position.

Metals index prices are expected to represent a $5 million to $15 million headwind based on the outlook for modestly softer ferrous and scrap aluminum prices. Our recent investment in the Palm Beach operating contracts and the start up of the New York City MTS will contribute about $15 million incrementally in 2019. This will be partially offset by the 2018 sale of 50% of the Dublin facility since we owned 100% of the plant for the first six weeks of 2018. We will also see a few million in headwinds to 2019 results from fleet optimization efforts including the shutdown of the Warren facility. However as Steve discussed, these activities will allow us to reduce risk and reallocate resources to other more profitable facilities which will benefit the company in the longer term.

Lastly, transitions will again be a small net negative primarily due to lower contractual client project debt service payments. After 2019 we no longer see this as a material headwind which if you've been a long term investor or analyst following Covanta, it's quite a milestone. This item has represented an adjusted EBITDA headwind of over $100 million over time.

Before move on, I want to mention that the first quarter of 2019 will be at normal first quarter for us with a typically high level of planned maintenance in the busy outage season. When comparing to Q1, 2018 remember that we had the benefit of insurance recoveries and owning 100% of Dublin for a portion of the quarter last year. Also energy prices were higher in Q1, 2018 than we've experienced so far this year. Overall this will make Q1, 2019 adjusted EBITDA lower than last year. This outlook is fully accounted for in our full year 2019 guidance which implies that the balance of 2019 will likely be favorable.

With Slide 12, I'd like to take a moment to illuminate the underlying trend of consistent growth in adjusted EBITDA that has been masked somewhat by the timing of insurance proceeds related to the Fairfax facility fire in 2017. To recap, we received $17 million of business interruption insurance proceeds in 2018 to reimburse us for amounts that we would have otherwise earned in 2017 if the plant were operational at historical levels.

In effect, the delay in collecting insurance had the impact of reducing 2017 and increasing 2018 results. For purposes of this discussion, if we take a simple step of moving the $17 million received in 2018 back into 2017 with the downtime occurred, you could have had a different picture. Looking at the chart on the right, which adjusts for the timing impact of insurance proceeds, you can see that our adjusted EBITDA trend has been consistently higher which we expect to continue in 2019 as organic growth and our investments are more than offsetting commodity headwinds and contract transitions.

Now please turn to Slide 13 for a walk from 2018 free cash flow to our guidance for 2019. We expect to grow free cash flow to between $120 million and $145 million this year in line with our preliminary 2019 comments on the Q3 earnings call. With adjusted EBITDA in a similar range to 2018 anticipated free cash flow improvement is driven primarily by lower maintenance CapEx year-over-year and improved cash flow from working capital which we expect to be flat or slight positive cash flow in 2019.

I'll conclude by looking beyond this year and restating our long term target of getting $250 million of sustainable annual free cash flow by the middle of next decade. Our steady progress on key strategic initiatives over the next few years including steps in the UK are the building blocks towards that goal. And we believe that the path to this target will become more clear as we move forward and continue to demonstrate tangible successes.

With that operator, we’d like to move to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Tyler Brown from Raymond James. Your line is open.

Tyler Brown

Hey, good morning guys.

Steve Jones

Good morning, Tyler.

Tyler Brown

Hey. First off congrats to all of you, really exciting to see all the progress. But hey Brad, just same-store pricing was up a very solid 3.5%. I appreciate the 3% guidance for ‘19, but I'm curious about say the next three to five years. I know you guys have a couple of large merchant waste contracts that reprice this year. You've been trying to shorten your contract lengths, but conceptually is there any reason to think that that 3% plus same-store pricing baseline, really isn't reasonable to think about even past 2019?

Brad Helgeson

I think that is a reasonable assumption. The contracted portion of the portfolio escalates at inflation, so 2% to 2.5%, but given the dynamics in our markets that we've talked about repeatedly, we see the ability to move price substantially, particularly as you point out as contracts roll over. So overall, we'd look to exceed inflation by the amount that, that we're demonstrating last year and expecting for this year.

Steve Jones

Yes, I think you're going to see Tyler, particularly in the north a lot of pricing moving up, pricing moving up pretty significantly and then also our profile waste business continues to click along 10% growth again this year. Regulated medical waste, drug take-back programs and there is a lot that's driving that business and they'll continue to drive it for the foreseeable future.

Tyler Brown

Right. Okay and good. And then on the energy side, I just want to make sure I have it as well, but at this point virtually all the big contract transitions are behind us, all that noise has largely sunset at least until the mid 2020s. So is there any reason here not to believe that the 2 million contracted megawatt hours will continue to see a price around 65 bucks and you've already given us capacity revenues, so the only thing that really moves in that piece is basically market prices and the rolling average impact on hedge prices?

Steve Jones

Yes, that's the way to look at it.

Tyler Brown

Okay, I just wanted to make sure I had that. And then maybe my last one for Steve, it feels like coming off of Fairfax you guys have really hit your stride or really humming from an operations perspective. I'm sure you can appreciate that it's a little hard for us to see the changes from the outside looking in, but can you talk about some of the continuous improvement initiatives that are really bearing fruit? And then despite running well, where do you think there's still opportunity to improve?

Steve Jones

Yes, so we've only rolled out things like stable operations and you've heard me talk about this before. At least you had the best operator on your on the board every minute of the day. And so, because I mean think about the fact that if you allow the linear programming model to run the plant it's probably better than a person running it right? You also need a person sitting there, but with smart equipment now it's just more efficient and effective to run that way with the computer and the programming model. So and that's the stable operation bit. And so we've rolled that out to our biggest plants, most profitable plants, but we haven't really taken that to the whole fleet yet.

So actually this past year, our continued improvement gross productivity was at the highest level ever. So we've been at it for - since I walked in the door, so say three, four years and we're just starting to hit strike now on the ability to take these tools and apply them to problems that we have in the plant or just day-to-day operations so that you get the most out of the plant every day. So there's a pretty long runway. I think it's years and it's not a couple of years it's a lot of years where we're going be able to continue working with Lean Six Sigma tools to make our operations more effective. And we talk a lot around here, we talk a lot about operational discipline now. How do we make sure that we've got disciplined operations at all of our plants?

Tyler Brown

All right. Yes, that's great. Congratulations and thank you.

Steve Jones

Thanks.

Operator

Our next question comes from the line of Brian Lee from Goldman Sachs. Your line is open.

Brian Lee

Hey guys, thanks for taking the questions. Good morning.

Steve Jones

Good morning.

Brad Helgeson

Good morning.

Brian Lee

A couple from me just on the UK development pipeline. Just first off could you remind us what the contracted status of into the facility bit today?

Steve Jones

Oh, how much waste is locked in up, so I couldn't hear you that well Brian. So if you look at, you know each of the projects has waste locked up probably to like the 70 plus level in that range it depends on the project. But, I mean that's the first thing that we go out and do is make sure that we've got access to the waste. So if you look - and you'll see that what we've tried to do is partner with waste companies, because they need, the UK is eliminating landfill capacity. The waste companies are good at getting waste on wheels and rolling the trucks around picking up waste, but they need access to disposal capacity. So if you look at roughly the OE is involved in that Protos and Newhurst it's Biffa and then up at Earl's Gate there's a couple of different local haulers, but all the way that's the first thing to go out and do is get that waste locked up.

Brian Lee

Okay, I appreciate that. And then I guess related to that with the Brexit uncertainty in the region, I know that's been an ongoing issue, but just the outcome there have any potential impact for raising debt financing or the cost of that financing, just maybe how you're thinking about that situation?

Brad Helgeson

Hi Brian, it’s Brad. You know like everybody else we're waiting eager to see how this plays out. We haven't seen any real impact so far and we don't expect it to impact our ability to raise base funding in storing for the projects. So yes, but I think the long term implications for the UK remains a question and we're watching just like everyone else.

Steve Jones

And one of the interesting things there was an article in The Guardian a couple weeks ago with respect to the fact that there's roughly 3.5 million tons that leaves the UK to the continent and there's some and so you need a permit or license that to move that, takes that, there's a hard Brexit that waste won't move as easily. And so, there were concerns and this played out in the Guardian article about waste kind of getting caught up in the system and what happens to it. So there could be there could be pros and cons associated with how Brexit plays out depending on where we go in the next couple, several weeks here.

Brian Lee

Okay, understood. Now that's helpful context. So maybe last question for me and then I'll pass it on. I know you guys get this question from time to time, but it seems like it's still a point of contention for some investors on the stock, but is there any flexibility particularly, as you start to have to commit capital to the UK pipeline over the next few years. But around the dividend policy is there any sort of flexibility to consider temporary shifts in, how much of a priority that is within your capital allocation strategy overall, is that on the agenda at [indiscernible] to be there has the board entertained this as a potential option as you lean closer toward again having the capital to sustain facility?

Steve Jones

Yes, if we look at the dividend policy I agree all the time, but in kind of more formally December of every year. What committed to the dividend? I don't think you're going to see a change there. I think what you hear is quite frankly our net debt to adjusted EBITDA higher than people like as Brad pointed out in his prepared remarks. We also have these great projects in the UK. So at least for 2019 we'll be, we're going to - our dividend is as I said we're committed to it.

What we focused on advancing these accretive UK projects and at least in 2019 I don't think you're going to see our net debt to adjusted EBITDA move that move that much it'll be kind of in the range and it is today, but we are, well it is not lost on us, by the way and I'd like to say that's all that's not lost on us and the Board that we need to move that number down as we move through time here. That net debt to adjusted EBITDA number.

Brad Helgeson

Yes and Brian, it’s Brad. I'll just add to that bit. Yes, I think the real consequence of a capital allocation policy that is weighted towards paying back capital to shareholders would be in theory that had gone the way of us being able to invest in the opportunities we have in front of us but that's not happening. You saw how we were able to refinance practically most of our balance sheet this year to really strengthen and improve our capital structure with our partnership with GIG and the credit strength of the UK projects, finance very efficiently.

So we sort of set things up where notwithstanding I think the optics of the dividend versus free cash flow here in the near-term. We've set things up where we think we can achieve. We know we can achieve both because of continuing to payout and strengthening the payout and then making sure that doesn't stand in the way of our investment opportunities.

Brian Lee

All right, thanks guys.

Operator

Our next question comes from the line of Michael Hoffman from Stifel. Your line is open.

Michael Hoffman

Good morning gentlemen. Thanks for the questions.

Steve Jones

Good morning.

Michael Hoffman

You all love to talk about waterfalls, so I'd like to ask the question and I think they're very useful and in the context of a waterfall, if you think about baseline of midpoint round numbers 450 is the starting EBITDA today, you have a goal to grow free cash to 250. To accomplish that before we get the benefit of the 40 to 50 from the UK, Domestic organic growth has to hold 3% or 4% growth rate in EBITDA. Can you waterfall us that the progression of that over the next three years, how we think where that's coming from at a high level, so we can appreciate what you've got in front of you to support that?

Brad Helgeson

Yes, Michael it's Brad. That's exactly right. So we look at so [indiscernible] UK for a second, yes we're looking at the organic rate of growth of the business. We've put up 3% to 5% target plus we repeat that in 2019 and feel pretty good adjusting for insurance about hitting that or beating it again this year.

I think the intention and the spirit away from putting too fine a point on how much of that 3% to 5% is going to come from the different pillars of the brand strategy, but it's really all of the things that we've been talking about, its continuous improvement in plants, it's metal recovery, it's waste prices and that’s obviously the underlying dynamics in our core markets in the northeast, as well as the opportunities to grow profile waste into the plants and grow the CES business more broadly. So I know that probably doesn't precisely answer your question, but we think we have a lot of arrows in the quiver if you will to make sure that we're hitting that 3% to 5% for the foreseeable future.

Steve Jones

Yes, we feel, I feel personally pretty real good about this. I think we have enough levers to pull when you look at some of the things that Brad just laid out. He talked about continuous improvement before, but we have TAPS out there, more metals recovery, profile waste, the CES business is growing well at 10% again this year. So I think we're in real good shape with respect to that part of it. A funnel or as you put it waterfall to the $250 million free cash flow.

Michael Hoffman

And just to be clear, I mean if the simple math is, if I take the midpoint this year at 130 you kind of have to get 70 from domestic and then the other 50 comes from development. And yeah, I really need that 3 to 5 to get that domestic piece right. That's the right way to think about it.

Steve Jones

That's exactly the way.

Brad Helgeson

That's exactly the way that I'm thinking about it.

Michael Hoffman

Okay. And then, can we talk about the debt just a little bit? I mean we do need to acknowledge that the very good total leverage probably ticks up some. But if you can do this 3 to 5 that helps temper that rising or it stabilizes and then as UK comes on we start that steady progression back down towards ultimate goal of four?

Brad Helgeson

Yes, that's right. And as I commented in the prepared remarks, we wouldn't really expect to be lower, plus or minus, we wouldn't expect to be lower as we exit 2019 than we are today. But that being said, the expectation isn’t that we won't see improvement until the UK projects come on line in three years. I think that will certainly accelerate that process, but we're going to look into it based on the growth in the domestic business we're going to be looking to grow EBITDA, cash flow, and thus be working our way down on leverage and then with the UK again coming on that should really accelerate us towards that long term target.

Steve Jones

Yes, on a lot of respects we're kind of growing into where we want to get to. I mean there's other ways to do it. You see us actually sell assets right? So that's one of the things I've been pushing hard on is underperforming assets or assets that don't make a lot of sense for us we're selling those, but I think what really will get us into the four times range is this 3% to 5% growth and ultimately the UK projects, but we'll kind of grow into the balance sheet a little bit here.

Michael Hoffman

But to be clear the markets should take in stride that 5, 6 probably lists might go to 6, but then stabilizes and starts working its way back down again gradually before UK comes in and then it steps down a little more aggressively. Nobody should be alarmed by that because you are going to spend some money on, that's going to come in as debt for the projects.

Steve Jones

Yes, that's directionally, I've been thinking about it. I think that's a fair statement.

Michael Hoffman

Okay, that's what I need to know. Thanks.

Steve Jones

Thanks.

Operator

Our next question comes from the line of Noah Kaye from Oppenheimer. Your line is open.

Noah Kaye

Good morning. Thanks for taking the question. Steve, let me just follow up on something you just mentioned around really optimizing the domestic waste energy fleet footprints. Now that the wheel [ph] operator sales Macquarie's final and of course with the disambiguate that it's not the same McQuarrie that you're partnering with for the UK project. Presumably those folks are looking to optimize the portfolio they've just bought as well. How are you thinking about the prospect of asset swaps or any kind of exchange of the assets between your two companies?

Steve Jones

I mean we had discussions with them about that. I'm certainly - that makes sense in some cases particularly to get synergies associated with it. I mean, one of the reasons we were most interested in Palm Beach was because it was kind of in our sweet spot with the number of plants that we operate in Florida. So there might be cases where they've got more operations in certain areas than we do and they can make a facility more profitable than we can because of their existing operations. So we certainly look at that with them. Obviously we have to pass any trust scrutiny around any type of swap. So that's always gets a little tricky.

Noah Kaye

Right. And then maybe a followup question to Michael's question around the leverage. It's my understanding that given the JV structure the debt for the UK project is not going to go on your balance sheet. We're really talking about impact to your net cash as you put more of the cash on your balance sheet to work for equity in those projects, is that correct?

Brad Helgeson

Yes, that's exactly right, yes.

Noah Kaye

Okay. So the upward impact to leverage from debt may actually be somewhat muted as you and as you see those projects come closer to be coming on line?

Brad Helgeson

Certainly over the course of a three-year construction period. Yes, that's our expectation.

Noah Kaye

Okay.

Steve Jones

I think we’re going in at different times too, so that's why Brad mentioned this in his prepared remarks. Something – in some projects it's front loaded in some it's ratable and then some it's back loaded, so I mean we're you know we'll manage that a little bit that way.

Noah Kaye

And then specific to Rookery Steve, I guess here with the appeal of the appeal you mentioned possibly finding a way to move forward, if the question is really, have you found precedents for projects like this or in a similar profile to proceed even with this sort of legal status a little bit up in the air, would that entail [indiscernible] or anything else?

Steve Jones

Yes, I mean it is people who will take on the risk. There's also other ways to kind of deal with the risk. I mean, the bottom line is we're pretty comfortable after looking at the High Court's ruling in November and then talking to our counsel that ultimately we'll get an operating permit. The way I see it we don't need the operating permit until we're in operation. So we've got a long period of time here during construction where we can sort this all out. So there are people who will close without the operating permit depending on where they see the ultimate risk.

Noah Kaye

Okay, so your comment that this will play out over the course of '19, again that we shouldn't read too much into that from a timing perspective that this is an end '19 event. It could come earlier than that.

Steve Jones

Yes, I'm expecting it will come earlier than that and this is my current view.

Noah Kaye

Yes. Thanks very much, I appreciate it.

Steve Jones

Sure, no problem.

Operator

Our next question comes from the line of Jeff Silber from BMO Capital Markets. Your line is open.

Jeff Silber

Thanks so much. I wanted to focus, excuse me, on TAPS. I mean, you mentioned the construction in the first half of this year it's not going into commission the second half of next year. But going forward, what kind of financial impact do you think that'll have on your business?

Steve Jones

So, the first one will probably be $5 million to $7 million of EBITDA now. Now we'll see it'll be interesting because I think there'll be some upside associated with it as we start to shake out the system, so we'll construct it, reconstruct it now. We'll start to do the commissioning end of the second quarter, into the third quarter and then we'll see how much throughput we can get through the equipment.

My current view is, we'll probably do better with throughput from some of the things that I've heard. So that will - so 5 to 7 I think is kind of our base case at this point $5 million to $7 million of additional EBITDA.

Brad Helgeson

Yes, and then Jeff this is Brad. Looking at that model through these systems, they're really based on in theory we move up new streams. We've made the investment case based on two of the three [ph], so that was covered by Steve with a wellington [ph] so it's really, not metal particularly small fractions of [indiscernible] and high value metal on a non-ferrous side is of course offsetting disposal cost as disposal cost to the extent wsurfaced sidevaso it's was alluding to. So it's really not a recovery particularly small fraction of heaven and high value metal on the non-ferrous side. Number two is of course offsetting disposal cost that's disposal cost.

To the extent that we're able to beneficially reuse material and in the third which we haven't done on as the market value of that reusable material who are things such as construction aggregate. So it's going to take us some time not only to be getting the project up and running, and working out some of the inevitable kinks but also from a market development standpoint, developing out those revenue streams so that 5 or 7 is kind of what we see based on the model today.

They are willing to get to get through that commissioning period and probably towards the back half of this year where we have a much better sense for how can we feel about that 5 to 7, then again it's moving to we think that longer term opportunity here is even bigger is higher.

Jeff Silber

Right, great. And I know you don't give quarterly guidance unfortunately we have the model by quarter. Is there anything to call out seasonally this year that might be different from last year? And if also you can remind us on the cadence of the BI insurance or the insurance proceeds, when you've got them last year during the quarter? Thanks.

Brad Helgeson

Yes. So Jeff, so for the first quarter, I mean there were couple of items, one was the Dublin, if you recall Dublin slowdown didn't close until around this time last year. So we had just about $5 million of contribution from the consolidation of Dublin for the beginning of the first quarter. So that will wrap from an anniversary standpoint with $7 million within our call in business interruption collection for the Fairfax fire. As we look at 2018 and as you think about the year-over-year as you move through '19 of course we collected another $10 million or so in the first quarter from the insurance.

So that's something to look out for moving through the year. I also commented on the strength in energy prices that we saw first quarter last year. That's kind of less of a less of an impact year-over-year comparatively, but we wanted to flag it. And then maintenance really should be typical trend. There is a little bit of movement, but nothing as we move into 2019 that we think is worth highlighting.

Jeff Silber

Okay, I appreciate that. Thanks so much.

Operator

Our next question comes from the line of Ben Kallo from Baird. Your line is open.

Ben Kallo

Good morning. I don't want to put the cart before the horse, but you've got a lot of projects going on. So I just kind of wanted to know what the development team is doing kind of for the next level and I know that's easy from my ivory tower here, but so thanks for any kind of color of future projects out there you guys are developing? And then on TAPS, could you just talk about how you guys view the overall addressable market there?

Steve Jones

Sure. With respect to project development, we're looking at other projects in the UK, so there were other projects that GIG was working on when we're looking at other projects, so the UK market needs more energy from waste. There's probably, I'd say there's probably a five year to 10 year window in the UK where there's going to be more energy from waste projects. So we'll get these four rolling and then there's some other earlier development phase, projects that we'll bring forward. There are also projects outside the US and that's why I mentioned it at the very end. I think international business developments important to our growth story.

So you may have seen that in the Philippines. We are working with Macquarie and Metro Pacific. We've been awarded the energy from waste plant in Quezon City. So outside of North Manila area and so we're working on that project. That will take a few years to work its way through getting all the permits and the financing set up and things like that. And, but there are going to be a number of projects in Southeast Asia that are potentially projects that we'll participate in. So there's a lot going on, I think you're going to see some in South America. We've recently seen an uptick in activity there.

So I think UK is going to be our focus. We'll do a lot of value creation if we focus on the UK for the next few years, but you're going to see some of these other locations start coming into play as the UK finishes their development of disposable, energy from waste disposal plants. And tax, yes what was the tax, oh kind of market size. So this particular plant will take acts from four of our facilities. We'll probably need another four or maybe five facilities depending on location. So what right now, Ben what we're doing is we're looking at the various various spots in our fleet where we can site plants whether they're out of our energy from waste facilities and then feed those regionally.

So, I would say this plant plus another four potentially is the round out our fleet. And then quite frankly there's what is really great or do maybe we can start to source ash from it's mother facility and run that through our plants, so there might be other opportunities to take this a little wider than our own facilities.

Ben Kallo

And I guess just back to the first question on Pipeline, just as far as cadence goes of development because we had Dublin, it was first and then all of a sudden we got four projects here. The next couple of years, is it going to be more of a steady-state kind of announcement on projects you think then with the last 10 years.

Brad Helgeson

Yes, that part of my goal is that is to get more projects in the development pipeline and then kind of have a steady growth of new plants coming on. I mean, because we're the largest or the biggest energy for waste company in the world and focus just on energy from waste, we get invited to participate in a number of projects. Some of them are further along in development and we kind of jump on the train as it's moving somewhere earlier in development. But we're going to look a little more closely now at filling that pipeline, so that we have a steady-state of growth of new energy from waste plants as time goes on.

Ben Kallo

Great, thank you.

Brad Helgeson

Thanks Ben.

Operator

And our last question comes from the line of Moses Sutton from Barclays. Your line is open.

Moses Sutton

Good morning. Could you talk a bit about the net IRRs expected at each of the UK projects assuming things continue to move along on time and you're in construction by your end at Orlem [ph]?

Brad Helgeson

Yes, hi Moses, it's Brad. So we're looking at cash on cash IRRs on an equity investment. This varies by project. I'm not going to get into project-by-project, but overall we're generally looking in the low to mid teens IRRs which given the way these projects are structured and buttoned up from a contractual standpoint we find those risk adjusted returns to be very attractive.

Moses Sutton

Got it. Is it fair to say that Earls Gate will be lower IRR than say Rookery assuming that you have no issue with Rookery?

Brad Helgeson

Yes, I think that's I mean [indiscernible] investment is attractive but yes, that's a fair assumption and there are couple of reasons for that, one is of course first and foremost the size, it is more generally more profitable at a higher return to bear these projects bigger. Of course we only get them to the size that the market needs. So that's why I just gave the smaller, but you would expect a general better, generally speaking a better return profile for a bigger plan at Rookery also Rookery was our project that we've been developing. Earls Gate we stepped in to serve, the nature of our arrangement again with the great investment.

Again with the Green Investment Group is the partner that has been developing the projects, the other partner will pay a premium based on a target IRR to buy into the project. So we'll get a nice return on both our best development dollars that we've spent and our sweat equity in Rookery which will help you overall return for us.

Moses Sutton

Got it. Thanks. And regarding the potential asset sales throughout 2019. I know you mentioned you'd give more detail throughout the year. Is there perhaps a target range of proceeds for ‘19 or ‘20, I'm not sure if you're willing to put a number to that yet?

Steve Jones

No not necessarily. So we have couple of components to it. So as I mentioned on the call, we are in the process of monetizing some non-core assets, the hydro assets. We closed one in 2018. There's another one that's just awaiting approval, so we’re closing it here in the early part of 2019. We mentioned three transfer stations that were selling, not all of those are closed either. So we'll be kind of finishing off those non-core asset sales and then if and as we UK projects come on line, rather move into past financial quarters into construction we'll be reflecting the premiums that we'll earn by selling down those projects in the context of our GIG partnership as those move forward.

Beyond that, we don’t have any specific targets, but as Steve mentioned, we have open minds and open eyes for opportunities where we can recycle capital for better returns for us, assets that make sense in other hands. So if any of those opportunities move forward we'll just refresh at that point.

Moses Sutton

Thanks. I appreciate the color.

Steve Jones

Thanks.

Operator

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

Steve Jones

Thank you for joining us today. As always we appreciate your participation and interest. As we discussed, we're making real progress on our strategic initiatives and expect 2019 to be an important year in continuing this momentum. Thank you again, and we look forward to seeing and talking to all of you in the coming months.

Operator

And this concludes today's conference call. You may now disconnect.