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Edited Transcript of CVA earnings conference call or presentation 25-Oct-19 12:30pm GMT

Q3 2019 Covanta Holding Corp Earnings Call

MORRISTOWN Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Covanta Holding Corp earnings conference call or presentation Friday, October 25, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradford J. Helgeson

Covanta Holding Corporation - Executive VP & CFO

* Daniel Joshua Mannes

Covanta Holding Corporation - VP of IR

* Stephen J. Jones

Covanta Holding Corporation - President, CEO & Director

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Conference Call Participants

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* Agnieszka Anna Storozynski

Macquarie Research - Head of US Utilities and Alternative Energy

* Brian K. Lee

Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst

* Michael Edward Hoffman

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research

* Noah Duke Kaye

Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst

* Patrick Tyler Brown

Raymond James & Associates, Inc., Research Division - MD

* Sou Chien

BMO Capital Markets Equity Research - Senior Associate

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to the Covanta Holding Corporation's Third Quarter 2019 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, that's https://www.covanta.com/ The 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.

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Daniel Joshua Mannes, Covanta Holding Corporation - VP of IR [2]

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Thank you, and good morning. Welcome to Covanta's Third Quarter 2019 Conference Call. Joining me on the call today will be Steve Jones, our President and CEO; and Brad Helgeson, our CFO. We'll 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 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 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, October 25, 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 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'd like to turn the call over to our President and CEO, Steve Jones. Steve?

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Stephen J. Jones, Covanta Holding Corporation - President, CEO & Director [3]

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Thanks, Dan, and good morning, everyone. For those of you using the web deck, the quarterly results are summarized on Slide 3 and I'll begin my discussion on Slide 4.

During the third quarter, we continued executing on our operating plan generating $125 million of adjusted EBITDA and $22 million of free cash flow. With solid performance in the quarter and line of sight on the remainder of the year, we are affirming our full year guidance of $420 million to $445 million of adjusted EBITDA and $120 million to $145 million of free cash flow.

Taking a moment to provide more context around our results. Bear in mind that the adjusted EBITDA of $125 million represents 2% year-over-year growth, even as we've seen 20-plus percent declines in the price of many of the commodities we sell. We overcame this headwind because we're able to drive organic adjusted EBITDA growth of 9% in the quarter.

The reliability and performance of our fleet of energy from waste assets is critical to our ability to grow organically. During the quarter, we processed 5.5 million tons of waste, an 8% increase over last year. This production includes 2.5% same-store tip fee volume growth and some of our largest tip fee plants continue to run at or near record levels as well as inclusion of the Palm Beach contracts acquired in September last year.

These improved operating results are no accident. Over the last several years, we've revamped our operating and supply chain management and instituted Lean Six Sigma techniques to improve the operations and reduce costs. Further, we've invested in our plants, and those maintenance dollars are paving the way to consistent operating performance. With 3 quarters of the year complete, we're right on track from a maintenance perspective and we expect 2019 to be another year of record production.

Our primary end-market is sustainable waste disposal, and our ability to capture improving waste prices across our EfW fleet has been a key driver of the financial performance. Tip fees were up over 4% in the third quarter on a same-store basis, with higher spot prices, effective recontracting and strong profile waste growth overcoming typically muted contractual escalation. As I like to say, it's a good time to be a waste company, especially with our assets in the Northeast and we expect to deliver tip fee price growth of over 4% for the year.

Covanta Environmental Solutions drove 10% growth in same-store profile waste revenue to our EfW plants. This increase was a product of both unit price and volume improvement. In order to facilitate these high-value waste flows our EfW facility -- into our EfW facilities, we're focused on maximizing the volume of material that is internalized through our material processing facilities or MPS.

The revenue internalized through our MPS increased by 25% in the quarter as we continue to utilize these complementary assets to service more customers and increase our profile waste sourcing capabilities. We expect this rate of internalization to grow further over time, supporting our expanded -- expanding profile waste business.

While profile waste comes in many forms, a key area of opportunity is regulated medical waste. During the third quarter, we grew regulated medical waste revenue by over 40% as we continue to ramp volumes to our 3 Energy-from-Waste plants that are permitted to accept this waste. While still representing a modest amount of the overall profile waste revenue, we see very strong growth potential and are working with regulated medical waste collection companies to source more volume. We aspire to be the leading provider of wholesale-regulated medical waste disposal services to that industry.

In order to reduce our long-term cost of ash disposal as well as to become more sustainable while creating new revenue opportunities, we've been developing our first total ash processing system or TAPS. The first TAPS plant is currently under construction at the Fairless

Hills, Pennsylvania metal processing facility. While we had expected to be fully operational by the fourth quarter this year, we've extended the construction time line a bit to optimize the equipment. This is the first system of its type and an exciting long-term opportunity for Covanta, so we want to make sure we get this first one right. We now anticipate beginning to start up some components later this year before moving into commissioning of the entire system early next year.

In the metal processing area, as we mentioned in the last couple of quarters, we've recently invested in technologies to further separate the various types of nonferrous materials we recover. This equipment began operations late in the third quarter and we're now separating higher value heavy metals like copper and zinc from lower value mixed nonferrous scrap.

As we discussed on the second quarter call, we continue to see a soft environment for many of the commodities we sell and this has not improved over the last 3 months. On scrap steel or ferrous, after a decline in the second quarter, HMS pricing appeared to stabilize in the third quarter in the $220 per ton range. In October, prices took another leg down with the index reaching $192 per ton. At these price levels, we believe that the markets will see a reduction in scrap flows, which should then stabilize prices. That's what these markets do. And longer term, we expect to see continued domestic demand growth for ferrous scrap as new mill capacity comes online over the next few years. However, while history tells us the prices should find market equilibrium again at prices well above current levels, the timing of the recovery is difficult to predict.

On the nonferrous side, the largest product we sell volumetrically is scrap aluminum. For much of the year, pricing has softened as China reduced the volume of this product it will accept and the smelters in the rest of the world have struggled to absorb the excess material. This has led to severe price pressure with the Old Cast Index now pricing at $0.37 per pound in October. This is down meaningfully from 2018 when price averaged just under $0.60 per pound. This is another reason why we're investing in technology to separate the nonaluminum components of the nonferrous stream as they often trade at 3 or more times the price.

Lastly, on energy, we've recently seen some stability in price, albeit at historically low levels. As you know, we have a formulaic program to hedge our energy exposure to reduce volatility. This has served us well in this market.

I'll conclude my remarks with a brief update on our U.K. development activities. Rookery and Earls Gate are now well into construction, and we continue to progress Protos and Newhurst towards financial close. Those projects are attractive and well structured, and we're actively engaged with our project partners, lenders and EPC contractors to swiftly move the projects forward.

The Protos project remains positioned to reach financial close in 2019, while the Newhurst project is right behind with financial close more likely in early 2020. Further, and as I mentioned in the last quarter, our partnership with GIG goes beyond these 4 projects and there are other earlier stage projects that are moving along as well. We look forward to providing more color on these projects as well as our efforts in other geographies when we have reached material development steps.

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

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Bradford J. Helgeson, Covanta Holding Corporation - Executive VP & CFO [4]

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Thanks, Steve. Good morning, everyone. I'll begin my review of our financial performance with revenue on Slide 6. Total revenue for the quarter was $465 million, up $9 million from the third quarter of 2018. Organic growth, excluding the impact of commodities, contributed $12 million as higher waste prices and strong EfW plant production outweighed lower construction revenue in the quarter.

Commodities had a negative impact as we saw a $13 million decline in revenue related to lower market prices for energy and metals. Transactions added $10 million to revenue in the quarter with the September 2018 acquisition of the Palm Beach operations and Q1 startup of the Manhattan Marine Transfer Station, partially offset by divestitures. Long-term contract transitions added $1 million in the quarter.

Moving on to Slide 7. Adjusted EBITDA was $125 million in the quarter, a $3 million increase compared to the third quarter of 2018. Excluding commodities, adjusted EBITDA improved by $12 million organically as the benefit of higher waste prices and plant production more than offset higher planned maintenance this quarter.

As we look ahead to the fourth quarter and full year, I would remind you that we will lap $11 million and $17 million, respectively, in business interruption and insurance proceeds received in 2018. We knew coming into the year that it would be challenging to meet our 3% to 5% annual organic adjusted EBITDA growth target given this year-over-year comparison and this remains the case. However, we expect to be in our target range, excluding the impact of insurance proceeds.

The $13 million headwind from commodity prices, as I just discussed, translated directly from revenue to the adjusted EBITDA line. The net benefit of transactions added $5 million to EBITDA in the quarter as the contribution from the Palm Beach acquisition and Manhattan Marine Transfer Station were again partially offset by divestitures.

For the full year 2019, we continue to expect adjusted EBITDA in the range of $420 million to $445 million. As Steve noted, we've seen a further reduction in metals prices since last quarter's call. We've revised our outlook range for metals revenue by a further $10 million to $20 million compared to previous expectations as you can see in the appendix to the slide presentation. This reflects lower scrap ferrous and aluminum market prices as well as a lower average sales price on nonferrous given the timing of startup of separation equipment at our Fairless Hills processing facility.

Further impacting nonferrous sales this year, we historically recovered mutilated coins and delivered to the U.S. mint for currency value. However, the mint has temporarily closed its redemption program this year in response to fraudulent activity, so as a result, we're currently holding coins in processed inventory awaiting shipment. In total and all else being equal, these factors in our metals business will likely move us to the lower end of our guidance range, though it should be noted that much of this essentially represents sales timing.

Turning to Slide 8. Free cash flow was $22 million for the quarter as compared to $85 million in Q3 last year. While adjusted EBITDA was $3 million higher in the quarter, working capital and restricted funds were a net cash outflow in Q3 and lower by $63 million compared to the cash inflow in Q3 2018. The 2 largest components of this were the final payment of holdback and dispute settlement amounts related to the construction of the Durham York plant, which we had previously accrued for and a shift in the timing of interest payments on high-yield bonds following last year's refinancing, which reduced cash interest payments in Q3 last year.

Our full year guidance for free cash flow is unchanged and these items were always contemplated in the range. Therefore, you should expect a sizable improvement in working capital and free cash flow in the fourth quarter, which is a fairly typical seasonal pattern for us.

Now please turn to Slide 9, where I'll review our growth investment activity. Over the first 9 months of the year, we invested just over $40 million in growth, most notably equipment to support the startup of the Manhattan Marine Transfer Station. Year-to-date, we have spent a little under $5 million on TAPS, but with equipment now being delivered and installed, we anticipate increased spend in the fourth quarter with further spend in 2020 as we complete construction.

In the U.K., we have spent $10 million year-to-date, which primarily represents our investment in Earls Gate where we fully funded our proportion of the equity as well as preconstruction site work, primarily at Rookery.

A couple of reminders here. First, our equity investment in Rookery was bridge financed at the project level and net of the premium and cost recovery received from our partners at financial close, we anticipate remaining funding requirement from the parent company of about $40 million in 2022.

Second, this forecast does not yet include our equity investments in Protos and Newhurst until they reach financial close. We'll provide more specifics on the amounts and timing of funding requirements for those projects at that time.

Please turn to Slide 10, where I'll provide an update on our balance sheet. At September 30, net debt was $2.5 billion, up about $30 million from Q2. Our consolidated leverage ratio was 6.0x, unchanged from June 30 and the senior credit facility covenant ratio was 2.4x. Our available liquidity under our revolver was nearly $400 million.

During the quarter, we issued our first series of tax-exempt green bonds, primarily to fund spending on TAPS and our Energy-from-Waste plants in Pennsylvania. With a 20-year term and 3.25% coupon, these unsecured bonds represent very attractive long-term funding that further enhances the cost, tenure and flexibility of our capital structure. We now have over $500 million of corporate tax-exempt bonds like this outstanding and will look to tap into this market in the future as an efficient means of funding domestic investment.

Before I turn it over to Q&A, I'd like to hand it back to Steve for some concluding comments.

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Stephen J. Jones, Covanta Holding Corporation - President, CEO & Director [5]

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Thanks, Brad. And I want to take a moment and reiterate a few things. Operationally, the year is going well and our investments in our plants and people are yielding the growth we expected.

The benefits of these investments are evident in our operating performance over the last several quarters. In U.S. market, we continue to benefit from a very supportive waste environment with strong volumes and declining alternative disposal options, which is driving waste pricing at our irreplaceable assets.

I also remain very excited about our progress on several growth initiatives. TAPS remains a major opportunity to improve our profitability and sustainability with broad-based opportunities throughout the fleet. On the development front, we're well on our way to reaching our initial target of 4 plants in the U.K. and we see broader opportunities in international markets as well as growth in the U.S.

With that, operator, let's move on to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Michael Hoffman from Stifel.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [2]

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Steve, I hope you feel better.

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Stephen J. Jones, Covanta Holding Corporation - President, CEO & Director [3]

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Yes, I know. I was going to say something when I first started off. Last Friday, I couldn't speak at all, so this is an improvement. So thanks for that.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [4]

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Brad, can I just get a clarity on the guidance side, my understood it? $420 million to $450 million remains. If you were able to sell the mutilated coins, it'd still be at the midpoint, is that what you're saying?

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Bradford J. Helgeson, Covanta Holding Corporation - Executive VP & CFO [5]

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Well, I think the mutilated coins is one of a few issues that are impacting us on the nonferrous revenue line. Of course, the first one is the underlying commodity prices. The second is our progress on increasing the average sales price by separating, and Steve alluded to this, the heavy metals, generally speaking from the lights, so the scrap aluminum. And then another piece of it is the mutilated coins. So I wouldn't -- I certainly wouldn't pin it all on mutilated coins, but it was significant enough relative to where we thought we were going to be that it was worth mentioning.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [6]

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Okay. But if you could sell the mutilated coins, would you be telegraphing we're in the lower half?

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Bradford J. Helgeson, Covanta Holding Corporation - Executive VP & CFO [7]

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Yes. The mutilated coins alone wouldn't move us back up to the metal. That's right.

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Stephen J. Jones, Covanta Holding Corporation - President, CEO & Director [8]

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But yes.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [9]

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Okay. Okay. That's what I was trying to understand. Okay. You have a target of $250 million in free cash over a 5-year period and $15 million a year supposed to come from U.S. domestic leverage and $45 million comes from the U.K. and that's assuming you do the $130 million this year that's the midpoint of your guidance. Is there anything that you look at in the business model under the conditions you're now living with, this lousy commodity environment and the like, that would preclude you from doing the $15 million a year on average to get that $75 million in place? It would seem the U.K. part seems reasonably good.

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Bradford J. Helgeson, Covanta Holding Corporation - Executive VP & CFO [10]

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Yes. So the short answer is no. I mean, I think the underlying drivers of the target when we originally put it out and the components of our strategic plan are unimpacted by commodity prices. I mean, that's the production and profitability of the plants. It's growing the metals recovery, ash management capabilities with TAPS, growing Covanta Environmental Solutions, profiled waste, regulated medical waste. I mean, there are a number of initiatives that we're focused on, none of which are impacted by commodities and that's what underpins the $15 million that you reference. And then, of course, on top of that, we're looking to grow our portfolio. Focus immediately is in the U.K., but we have our eyes out over the horizon on other international markets, as you know, and then ultimately, opportunities domestically. So all of that is unchanged.

I think as regards to the $250 million specifically, commodities obviously impact our results. And so I think we do have to recognize that if commodity prices are materially lower than where they were when we set the guidance, as they are today on the order of probably $50 million when you step back, that's going to impact our results. And all else being equal, probably the best way to think about it is it just makes the path to $250 million a little bit longer.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [11]

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Okay. But you'll still get to the $250 million. It's not that you're permanently lowering the number; it's going to take you longer, is that what you're saying?

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Stephen J. Jones, Covanta Holding Corporation - President, CEO & Director [12]

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Yes. This is Steve. Yes, that's what we're saying. And some of it depends on what's -- when does the commodity environment snap back to the mean, right? We're not sure and everybody can -- everybody on the call can take a view on that obviously, but that's an important consideration when you start to think about the time it takes to get to $250 million.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [13]

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Okay. I have 2 kind of high-level housekeeping-type questions. You have a peer company that has not had particularly good press lately, one around a landfill expansion for ash and the other air pollution equipment. Can you contrast why you're different?

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Stephen J. Jones, Covanta Holding Corporation - President, CEO & Director [14]

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Yes. So -- yes, we saw those too. If you look at -- let's take the second one first, air pollution equipment. I think out of our 40 facilities now, we have 2 facilities that don't have baghouses. And so -- and that's -- and this other company is, I think, dealing with issues around not having a baghouse in a particular facility, I think, that's what you're referencing.

We're in the process now of determining when we're going to add baghouses to the 2 facilities. So it's limited in number and we'll think about -- it'll present lumpiness in the year that we decide to add the baghouses, but as a general matter of maintenance, isn't really going to vary much from the inflationary bogey that we put out there. So we've got a good handle on air pollution control from that perspective.

With respect to -- the first part was, again?

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [15]

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Ash, they got denied a permit for a landfill actually.

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Stephen J. Jones, Covanta Holding Corporation - President, CEO & Director [16]

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On the ash, yes, they got denied at Putnam. Yes. We have multiple -- in most of our plants that we were responsible for the ash, we have multiple options in order to be able to get our ash put into an ash landfill or ash monofill. So we're not particularly worried about that. We've got -- I think we've got really good programs in place to be able to backup what we need to do from an ash standpoint.

And then the other side of that is TAPS, right? So one of the reasons we're interested in TAPS and I used the words financially and from a sustainability standpoint in my prepared remarks, is that TAPS allows us to reduce the volume of ash that's going to go into an ash monofill. So we're very excited about what's going on at Fairless Hills right now and that will help us to reduce -- even if we had issues, which we don't, that would reduce the volume of ash that needs to find a home.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [17]

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All right. And then last for me. Brad, can you tell us what the hedging rate we should be using for 2020 at this point?

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Bradford J. Helgeson, Covanta Holding Corporation - Executive VP & CFO [18]

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In terms of price?

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [19]

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Yes.

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Bradford J. Helgeson, Covanta Holding Corporation - Executive VP & CFO [20]

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Yes, I think it's a little early. We'll mail that out in February. So it's a little early to -- because we're still hedging for next year to put a specific number on that, though, I think a reasonable expectation would be that it's going to be modestly lower than the hedge rate overall for this year.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [21]

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With the emphasis on the word "modest"?

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Bradford J. Helgeson, Covanta Holding Corporation - Executive VP & CFO [22]

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Yes, I think that emphasis is appropriate.

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Operator [23]

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

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [24]

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I want to ask you a question around operations and, in particular, increasing the plant throughput. You've got 2.5% same-store volume increased growth this quarter. And just broadly, I think this is an area you talked about, getting stable operations that improves uptime. I mean, I think about 0.5 million ton increase in the tip fee plants, that's a $25 million to $35 million bump in revenue. So I guess, the question here is really, can you give us a sense of how much of the fleet is operating close to permitted capacity? How much cushion do you have under permits to increase throughputs? Would you need to seek expansions to permitted capacity as you improve through Lean operations? Just how much runway you see for the sort of stable operations, Lean operations to drive higher throughput?

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Stephen J. Jones, Covanta Holding Corporation - President, CEO & Director [25]

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Well, I'll start with this, and then Brad can jump in. So stable operations, first off, we're not using it at all our plants yet. We know we picked our biggest plants. So they're the ones that actually came through this quarter. So the reason you see the 2.5% same-store growth is these big tip fee plants, think places like Essex, for example, or Hempstead. They're operating really well at this point, and that's because we've been using stable operations, which is basically you've heard me talk about this before, is as if you had your best operator on the board 24 hours a day, 7 days a week. And so that's working well. We will get more leverage from stable operations as we move it out to some of our other plants, which are a little smaller in size. So this is -- this will be a path that will continue for some period of time.

I would say on how we operate from a permit standpoint, we try to operate at the limit of our permits all the time. And so -- and with the waste market the way it is right now, which is a great waste market, there's plenty of waste out there, so we can operate at the limit of our permits.

The issue and -- or the benefit you saw, particularly in this quarter, is we had less downtime. So we were able to -- we always have some downtime on our plants. Because of stable operations, we were able to limit that downtime as you look at this past quarter and that's what we're expecting stable operations to do as we move forward.

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Bradford J. Helgeson, Covanta Holding Corporation - Executive VP & CFO [26]

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Yes, I would just add, as it relates to the permits, we're seeing at a few of our big plants the permit limitation is now relevant to the production, whereas in the past, it hasn't been. So in those situations, we'll look to see if there is flexibility for us to modify the permits, if the plant is sustainably operating at a higher level.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [27]

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Okay. That's very helpful. On then on the TAPS facility, the first one that you're standing up. I think you talked in the past about targeting around the 20% unlevered IRR in that type of project. I guess, just how long do you need to see that facility operate before you would get comfortable enough in the returns to put capital into additional plants? And just give us an idea of how long do you think it might take to put the processing capacity in place to cover the full fleet?

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Bradford J. Helgeson, Covanta Holding Corporation - Executive VP & CFO [28]

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The plants -- we're going to start to commission some of the aspects of the plant later this year and then kind of full commission next year. And I mentioned that in my prepared remarks. I think the plant needs to run for, I'd say, a couple of quarters in order to make sure everything is working the way we expected it to.

This is not new technology. So I'm not particularly worried about the technology risk. There is this technology that's been used in other industries. So we're putting -- it's novel, if you will, as it relates to our industry. And the ramp-up in the size is bigger than it's been used in some other places. So that's what we're going to need to test out over these, let's say, a couple of quarters. We also want to make sure that the sands and the aggregate that we produce gets de-wasted, which is effectively it's got to go through a testing process in order to then be used in DoT-approved roadways. So it can be used in other applications before then. But -- and so that's going to take it -- that's going to take a couple of quarters to work that out.

And then, quite frankly, right now, we're in discussions with clients and also looking at our own plants on when we roll out the next TAPS projects. So they're going to move -- the long lead time item, I mean, you saw it on the Pennsylvania TAPS and the one in Fairless Hills was permitting. So we're in the process now of lining up the permitting -- the resources to get the permitting well underway. So that's the leading indicator. And so we'll start that process even as we're waiting these couple of quarters to see how the Fairless Hills TAPS operates.

How long it'll take to roll out over the whole fleet, I'd say probably 2, 3 years, something like that, and probably on the later end of that time line. Again, the pacing item is going to be permitting. So -- and as you saw in this first one, it was a little variable depending on the state.

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Operator [29]

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Your next question comes from the line of Tyler Brown from Raymond James.

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Patrick Tyler Brown, Raymond James & Associates, Inc., Research Division - MD [30]

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Great job on controlling the controllables, but I do want to come back to HMS. Can you guys give us any color on what's exactly going on in that market? Do you think that it's being influenced by the U.S./Turkey relations? Or do you think it's destocking at domestic mills? Just any additional color there?

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Stephen J. Jones, Covanta Holding Corporation - President, CEO & Director [31]

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Yes, it's probably a little bit of both. The noise around Turkey and then that's recent is -- and you saw the leg down in October on HMS #1 Index, it could have been -- it could have had some impact from the Turkey situation. We certainly think there's destocking going on. We saw some -- to go take a look at Nucor's comments, there's been some comments out from other companies that they -- that generally, they think we're at the bottom, and now we're going to start to move back up again. We'll see how that -- we'll see how that plays out.

I think as a general matter, we'll continue to reclaim all the metal that we can. The alternative for us, unlike some other folks, is we have to pay to get rid of it, pay to put it in -- stay in the ash and then we have to pay to get rid of the ash. So it makes a lot of sense for us to kind of collect the metal, and then we'll see where the HMS Index comes out. But it does feel to me that we're kind of at and around the bottom, and it's going to start moving up from here.

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Patrick Tyler Brown, Raymond James & Associates, Inc., Research Division - MD [32]

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Okay. And then, Brad, on free cash. So I just want to kind of get to the bottom of this restricted cash benefit. So I see that the flows from restricted funds was increased, I think, this quarter to $15 million to $20 million for '19. So wondering if, number one, you can just talk about what's going on there. But maybe two, if you can talk, is this a cash flow that will be recurring in 2020 and beyond?

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Bradford J. Helgeson, Covanta Holding Corporation - Executive VP & CFO [33]

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Sure. Well, there's really 2 pieces to it. So I'll take the first one, and this explains the increase. We have a movement in a restricted account under one of our service fee contracts with a client earlier this year. And so really, the increase in the range accounts for that. Essentially, you had cash come out of a restricted fund and went right back out the door through working capital, so essentially, net neutral. It's just -- and that's why you saw an offsetting change to the guidance range for working capital change. That's just in and out, and that was about $5 million.

The other piece is one that has been more permanent and will go away next year. So for the last few years, we've been receiving, on an annual basis, cash distributions from a trust related to the ownership structure of the Delaware Valley facility. Those cash distributions concluded earlier this year. So all else being equal, you should expect the restricted fund line -- look, there may be plus or minus in a quarter. But on a sustained basis, it should be essentially 0 over time.

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Patrick Tyler Brown, Raymond James & Associates, Inc., Research Division - MD [34]

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Okay. Okay, that's helpful. And then maybe on the working capital side, and I know it's early, you probably haven't done all your budgeting. But is that -- so I think that's positive this year. Is that something that is recurring as well, maybe into '20 or even beyond that?

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Bradford J. Helgeson, Covanta Holding Corporation - Executive VP & CFO [35]

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Yes. I guess, I'd probably say a couple of things. One, as you know, as we talked about several times, the working capital efficiency is a long-term initiative. And we've gotten a lot of value out of that over the last few years, and that's AR collections primarily, but it's also AP management. So I would hope that we're going to continue to get efficiencies over time. That being said, in this business, working capital can be lumpy quarter-to-quarter, year-to-year. And ultimately, out over the long term, and this isn't necessarily a comment specific to 2020, but over the long term, it's probably appropriate as a modeling assumption to assume that working capital isn't going to be a persistent $10 million, $20 million benefit to us indefinitely. And that will ultimately reduce -- the opportunity will reduce over time.

So as far as 2020, again, it can be lumpy, and so we're just not really in a position at the moment to put a finer point on it.

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Patrick Tyler Brown, Raymond James & Associates, Inc., Research Division - MD [36]

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Yes, yes. No, that's very helpful. And then maybe on the total EfW maintenance spend. So I think this year, you guys are looking for $415 million at the midpoint. And I think maybe 30% of that is attributed to maintenance caps, CapEx. But I'm curious, does that exchange? Or should we just grow that maintenance spend and assume that it's about 30% is maintenance CapEx? Or is that the right way to think about it?

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Bradford J. Helgeson, Covanta Holding Corporation - Executive VP & CFO [37]

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My response to that, unfortunately, is going to sound a little similar to our response on working capital. I mean, it can be lumpy, and it could move up and down in a particular year. I think for maintenance, and Steve alluded to this earlier, really, what we look at is an underlying trajectory of what's the annual spend now and going forward that's going to be required to maintain these plants and keep them at peak operating condition. And that's a spend that is going to -- plus or minus, going to grow with inflation or inflation plus or minus over time.

In a given year, the profile of spend is subject to the long-term maintenance plan. And then that's, okay, how much of it is more weighted towards expense versus capital? And also, what is the aggregate spend? So I guess, in summary, of all that, you can't necessarily look at 2018 and extrapolate -- or sorry, 2018, 2019 and extrapolate to what would that mix be in 2020.

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Patrick Tyler Brown, Raymond James & Associates, Inc., Research Division - MD [38]

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Okay, okay, interesting. Okay. And then my last one. So Steve, with these 2 plants without baghouses, are these large tip fee facilities?

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Stephen J. Jones, Covanta Holding Corporation - President, CEO & Director [39]

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Yes. Yes, both of them are. I mean, they use a different technology. And so these are plants that are -- that we own, and we're looking at, okay, what do we want to do. The other technology, the non-baghouse technology's called ESP. It works just fine. But baghouses are becoming more popular at this point. So we're looking -- as I mentioned, we're looking right now at, okay, what do we want to do? What's the timing on changing out to a baghouse rather than the ESP.

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Operator [40]

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

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [41]

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Maybe just going back to the free cash flow topic for a moment. Brad, it seems like the free cash flow is obviously much more Q4 weighted than it has been in past years. I know you've talked through some of the moving pieces here, but can you kind of walk us through, again, a little bit of the dynamics driving that this year versus the cadence we've seen in past years? And then that steep ramp that you do need in Q4 to hit the full year target, kind of how derisked do you see that being right now?

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Bradford J. Helgeson, Covanta Holding Corporation - Executive VP & CFO [42]

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Yes. So we actually have had precedent historically for the free cash to be heavily weighted in the fourth quarter, we saw that a couple of years ago. And I mentioned this earlier, really, the driver is going to be working capital based on how we see the rest of the year playing out.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [43]

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And from a derisk perspective, you see that as being pretty solidly in hand at this point? I know you're taking the EBITDA guidance down to the lower end. How are you kind of thinking about where you're settling out from a cash flow perspective?

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Bradford J. Helgeson, Covanta Holding Corporation - Executive VP & CFO [44]

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Yes, we feel comfortable with the guidance.

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Stephen J. Jones, Covanta Holding Corporation - President, CEO & Director [45]

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Yes, we're comfortable with that guidance. So it's -- the working capital slide, as we've showed in the past, whether it's accounts receivable or accounts payable, there's levers that we can adjust in order to get positive working capital in the fourth quarter.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [46]

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Okay, fair enough. And then just maybe switching gears a bit. I know earlier in the call, you mentioned investing in technology to remove some nonaluminum metals given the higher pricing potential there. Can you maybe elaborate a bit on what goes into that and the potential timing of deploying that? And then just in terms of impact, does that really move the needle from a volume perspective, if you're successful? Just trying to get a handle around whether or not that could be a strategy to help on the metal side of the business?

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Stephen J. Jones, Covanta Holding Corporation - President, CEO & Director [47]

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Yes, it's clearly something -- it's actually in operation now. So what we've looked at was -- and it's interesting. I don't think some -- other companies aren't necessarily doing this. I got a note from my -- from Steve Bossotti, who does our metals management about this yesterday. This is color sorting. So basically, you're looking at taking nonferrous and using technology that color sorts in order to take out -- in order to split the nonferrous into its kind of piece parts. And some of the darker nonferrous metals, so the heavier and darker nonferrous metals, traded 3x the price of some of the other metals. So it can move the needle. You don't need a lot of it to make it impactful and as I said, we're -- I've been out to see the unit. It's in operation now in the third quarter, and we actually had stockpiled some of our nonferrous in order to run it through this unit in order to take advantage of its capabilities.

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Operator [48]

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Your next question comes from the line of Angie Storozynski from Macquarie.

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Agnieszka Anna Storozynski, Macquarie Research - Head of US Utilities and Alternative Energy [49]

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So I have a bigger picture question. Nobody has really asked a question about your 2020 guidance, and I understand that you're not really willing to provide it, but can you at least directionally tell us if you think that if the current commodity price environment were to persist and you would continue to see the pickup in sales and volumes, would we see a year-over-year growth in EBITDA? So that's one.

And two, how should we get more comfortable with your ability to support your dividend given that there's -- the commodity prices are weighing on our free cash flow and your net debt-to-EBITDA is already at 6x?

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Bradford J. Helgeson, Covanta Holding Corporation - Executive VP & CFO [50]

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Sure. Angie, it's Brad. So on 2020, and you said it at the top, we're not giving guidance for next year, whether that's specific or directional. But I think there are a few sort of building blocks, if you will, when you think about 2020 that I'll mention.

One is the underlying rate of organic growth, which is sort of all-encompassing with the initiatives that we're focused on, and that 3% to 5%, nothing has changed that would impact our view on that. So that's something you can count on from us when we roll out our 2020 guidance.

The other big one, of course, is commodities. It's a variable that we can't predict. I think if you -- if you look at current spot prices and you extrapolate that across calendar year 2020, that's not necessarily our view, but if you did that, that would imply a headwind year-over-year. And of course, the kind of handy rules of thumb that we've talked about to help people kind of frame what that impact could be, are for HMS, for every $25 move, it's about a 4 to 5 -- on a full year basis, 12 months, it's about a $4 million to $5 million revenue EBITDA impact for Old Cast, which is the underlying index for aluminum. Every $0.05 is about $2 million to $3 million. So based on what your view is going to be for commodities for next year, that's how it would flow through into an estimate for 2020.

The other question around the dividend, our dividend policy is something that we stand behind. And as we've said many times, the dividend policy is based on what we view as the long-term sustainable cash generation in the business, not based on cash flow in any particular period or certainly not based on commodities in any particular period. And to the extent that our long-term view is that we're going to be growing cash flow sustainably, that's what supports the dividend. So I'm not sure how better I could answer it than that.

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Stephen J. Jones, Covanta Holding Corporation - President, CEO & Director [51]

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Yes. I mean, let me be clear, we're committed to the dividend. We clearly don't see a case where we don't -- we're not going to be able to support that dividend as we look out in time. For us to even consider changing our dividend, we'd have to have a persistent reduction in free cash, as Brad mentioned. And quite frankly, we see free cash growing with our -- up to $250 million over the next several years, and we talked a little bit about that earlier in the call. So we think we're in a pretty good place.

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Agnieszka Anna Storozynski, Macquarie Research - Head of US Utilities and Alternative Energy [52]

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And just one bigger picture question. So are you trying to basically change the design of some of your contracts to make them less dependent on commodity prices? I'm asking, well, not only because we have this downturn, but also, if you look at the Northeast, you have all kinds of structural reasons why power prices could continue to decline. You have offshore wind, you have this issue in New York ISO about potentially putting a carbon price on power generators. Can you talk us through how you perceive your market positioning from that perspective?

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Stephen J. Jones, Covanta Holding Corporation - President, CEO & Director [53]

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Yes, that's a tricky question. The markets clearly are changing. In a lot of respects, the -- what drives our business is the waste side of the business. And then the power is, in some respects, a byproduct. So one of the things we've been trying to do is figure out how to sell that power not just into the grid, and very difficult these days to get long-term contracts. We have a long-term contract in Long Island, for example, but to get those types of contracts is difficult. So one of the things that we've been looking at is whether we can sell the steam rather, and turning the steam into electrons and sell the steam directly to customers in and around our plants. We do that in places like Niagara, for example, our Niagara facility. We're looking at other options around that. I've talked about a few of them on prior calls.

And then on the electrons itself, we got involved in the BGS auction. We're looking at other ways to sell these electrons in a way that's more valuable to our investors. And we'll look at direct lines, for example. So there's a couple of our facilities that are close to other large users of electricity, and can we sell directly to those large users at some middle price? So we wouldn't -- we'd be selling it higher than wholesale and maybe buying it at lower than retail, but to make both parties happy.

So they're the types of things that we're looking at right now. But those business development efforts do take some time has been my reaction because we've been looking at these for a couple of years at this point just because of the way the market has been playing out.

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Operator [54]

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Your last question comes from the line of Henry Chien from BMO.

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Sou Chien, BMO Capital Markets Equity Research - Senior Associate [55]

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Just wanted to -- I figured, I just had a question to explore a little bit more the -- maybe not necessarily explicit guidance, but the one area beyond the organic growth. Like what are the projects or factors, I guess, that would also impact free cash flow and EBITDA, if we think about 2020?

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Bradford J. Helgeson, Covanta Holding Corporation - Executive VP & CFO [56]

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Well, our big focus, Henry, it's Brad, in the project area is, of course, the pipeline in the U.K., and that's something that's going to impact us when those plants come online in the -- at least for the first 4 that we're developing that we've been talking about in the 2022, '23 time frame. When you think about 2020, really, the drivers for us are the ongoing initiatives under the organic growth umbrella, and that's encompassed in the 3% to 5%.

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Stephen J. Jones, Covanta Holding Corporation - President, CEO & Director [57]

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So you think about things like waste pricing, metals -- additional metals recovery, TAPS, continuous improvement, profile waste, regulated medical waste, Covanta Environmental Solutions, they're all the things that we're undertaking in order to grow the company. And a lot of that is -- that's more on the domestic side. Brad mentioned more the international side.

And then on the international side, and I'll mention this, we're looking at other projects outside the U.K., I mean, there's other -- there's additional projects inside the U.K., the GIG, was one of the reasons we partnered with GIG in the U.K. Outside the U.K., you may have seen some publicity around a project in the Philippines that we're involved in. There's projects in China that we're looking at. There's a lot of energy from waste, new plant activity that's occurring. And places like China, quite frankly, they build these plants very quickly. It doesn't take them 3 years to build a plant in China. It's half the time. And so depending on what we do with some of these other markets, that will also flow into maybe not 2020, but not too many years further out from 2020.

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Sou Chien, BMO Capital Markets Equity Research - Senior Associate [58]

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Got it. Okay. That makes sense. And I guess, maybe just for the next 12 months or so, not -- with that sort of view, any kind of milestones that you're looking at going forward or timing-wise? Or just kind of regulatory hoops or mid-wise, things that you guys are looking out to?

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Bradford J. Helgeson, Covanta Holding Corporation - Executive VP & CFO [59]

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I think the key milestones, I'm not sure if this is your question, but the key milestones that we're focused on are having all 4 -- getting all 4 of the initial projects in the U.K. into construction. So 2 down, 2 to go. We're focused on Protos and Newhurst now to get those going. It's getting TAPS up and running. And then as Steve was talking about, based on the operational performance of that unit, rolling that out across the fleet. So I think if we can meet those milestones and build from there, we'll be in a really good position, and that's where we're focused.

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Stephen J. Jones, Covanta Holding Corporation - President, CEO & Director [60]

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Yes. And the other thing I'll mention, too, and this is a U.S. comment for new energy from waste, there are opportunities for new energy from waste in the U.S. You've seen some -- there's been some public announcements and some of our clients, some of these are client opportunities. Some of them maybe tip fee opportunities where we own the plant. So even in the U.S., I would have told you in the beginning of my tenure, there wasn't going to be a lot of new energy from waste in the U.S. I think now I'm changing my view a little bit. I think there's going to be opportunities for us here in the U.S. and there will also be varying time lines associated with those opportunities.

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Operator [61]

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There are no further questions at this time. I turn the call back over to the presenters.

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Stephen J. Jones, Covanta Holding Corporation - President, CEO & Director [62]

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Well, we want to again thank everybody for joining us for the call today, and we appreciate your ongoing interest and support in Covanta. Have a good day, and have a good weekend. Thanks.

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Operator [63]

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